OTHER THINGS YOU MAY HAVE MISSED – NOVEMBER 21

21st November 2018

€1 BILLION WORTH OF SMUGGLED TRAMADOL PILLS DESTROYED – SEIZED IN MALTA FREEPORT

The Times of Malta on 20th November reported that the DEA has destroyed over €1 billion worth of illegal drugs seized by Malta in 2017 and destined for use as a fund-raiser for ISIS.  Malta Customs and the police worked with the DEA and the US Embassy in Malta to destroy the 215 tonnes of illegally smuggled tramadol pills that had been found in 13 containers at Malta Freeport.  The drug is a synthetic opioid trafficked by terrorist groups to generate revenue.

https://www.timesofmalta.com/articles/view/20181120/local/1-billion-worth-of-smuggled-tramadol-pills-destroyed-in-joint-maltese.694768

4 RUSSIAN TANKERS UNDER SANCTIONS FOR SMUGGLING OIL TO SYRIA

The Maritime Bulletin on 20th November reported that the latest US sanctions included 4 Russian tankers on the list – ALMETYEVSK (IMO 9621558, owner AK BARS Leasing, Kazan, Russia); TRUVOR (IMO 9676230, dwt 8900, owner Trinity Shipping, S-Petersburg); VOLGA (IMO 9104770, owner STAKSEL Co., Samara); and YAZ (IMO 9735323, owner TRANSPETROCHART, S-Petersburg).

http://maritimebulletin.net/2018/11/20/four-russian-tankers-under-sanctions-for-smuggling-oil-to-syria/

TRINIDAD & TOBAGO BANKS LOSING CORRESPONDENT PARTNERSHIPS BECAUSE OF COUNTRY’S FAILURE TO COMPLY WITH INTERNATIONAL TAX RULES

On 20th November, according to Newsday, the head of the Trinidad & Tobago bankers’ association is reported to have confirmed the Attorney General’s assertion that local banks have started to lose correspondent international partnerships because of the country’s failure to comply with multi-lateral tax regulations, and said that he was aware of one bank that has lost 2 correspondent banking relationships.  Despite signing up to on to several international tax conventions, including the Global Forum on Transparency and Exchange of Information for tax purposes and FATF, the country lacks compliant legislation, and it has until the end of November to pass the first compliant legislation, amendments to the Income Tax Act, or potentially face a backlash if foreign banks refuse to do business with local counterparts.

https://newsday.co.tt/2018/11/20/batt-tt-banks-already-blacklisted-abroad/

AUSTRALIA: CBA ‘FAILURES’ HINDERED POLICE ENFORCEMENT OF MAJOR CRIME

Business News Australia reported that police and law enforcement authorities were unable to disrupt money laundering by drug and firearm syndicates because of Commonwealth Bank’s “failures”, according to its CEO.  He made the dramatic admission that the contraventions were extremely serious at a banking royal commission hearing.  In June, CBA paid a $700 million penalty for AML/CFT failings over failure to notify AUSTRAC of more than 53,000 transactions at its network of so-called ‘intelligent’ automated cash deposit machines (IDM), with a total transaction value of $624 million.

https://www.businessnewsaus.com.au/articles/our–failures–hindered-police-enforcement-of-major-crime–cba-boss-admits.html

BRAZIL’S PRESIDENTIAL CANDIDATE ACCUSED OF MONEY LAUNDERING

The Rio Times reported on 20th November that the PT (Workers’ Party) candidate and ex-mayor of São Paulo defeated in the race for the Presidency of Brazil, Fernando Haddad, is a defendant against charges of passive corruption and money laundering.  The Public Prosecutor’s Office in Sao Paolo accuses him of receiving a bribe from a construction company to pay off campaign debts in 2012.

https://riotimesonline.com/brazil-news/rio-politics/brazils-ex-presidential-candidate-haddad-accused-of-money-laundering/

SINGAPORE: PROPERTY DEVELOPERS FACE NEW AML/CFT RULES
Channel News Asia on 20th November reported that new rules just enacted by the parliament will require them to perform due diligence checks on their buyers and flag suspicious activity.
https://www.channelnewsasia.com/news/singapore/parliament-developers-new-anti-money-laundering-terrorism-rules-10950130

CENTRAL BANK OF CYPRUS SHIP MANAGEMENT SURVEY

On 21st November, Elias Neocleous & Co LLC published an article saying that since 2009 the Central Bank of Cyprus’s statistics department has carried out semi-annual market surveys, covering residents of Cyprus who provide ship management services to ship-owning companies registered in Cyprus and abroad. The surveys collect data on the financial transactions (revenues and expenses) between the resident ship management companies and non-residents of Cyprus.  The article provides some details from the latest survey.  Of note –

  • ship management revenues make up 5.1% of Cyprus’s GDP – the highest level recorded since 2013;
  • the top 28% of the companies surveyed accounting for 90% of total revenue;
  • the main export destination for the services of the ship management industry was Germany, with 47% of the sector’s revenue, but with Russia in joint second place with 7%.

https://www.neo.law/2018/11/20/publication-of-latest-central-bank-of-cyprus-ship-management-survey/

INSURANCE CLAIM FOR LOSS OF FRAUDULENT CARGO

The Shipping Bulletin from Stephenson Harwood for November 2018 included a report on the case of Engelhart CTP (US) LLC v Lloyd’s Syndicate 1221.  In this case, the defendant insurers face a claim involving a supposed 7,000 tonnes of copper ingots.  When the containers were opened to inspect a leak, it was discovered that they did not contain copper ingots, only slag of nominal commercial value, and no copper was ever shipped. The bills of lading, packing lists and quality certificates were therefore fraudulent.  The court held that, on the facts, no copper was ever shipped, so there was no cargo to be physically lost or damaged.  The assured’s losses were economic losses due to the acceptance of fraudulent documents in the expectation that they covered physical goods, and the relevant clause in the insurance contract expressly referred to the physical loss of goods – and there cannot be a physical loss when nothing existed in the first place.

https://www.shlegal.com/insights/shippingbulletin—november-2018

CIGARETTE SMUGGLING ORGANISED CRIME GANG FROM EASTERN EUROPE BUSTED

On 19th November, a news release from Eurojust reported that on 15th November, co-ordinated action was taken against an Italian organised crime group involved in the smuggling of cigarettes from Eastern European countries into Italy.  8 people were arrested, and assets totalling €15 million were seized during searches in 2 countries. The cigarettes were stolen from a factory in Eastern Europe, with a destination in Libya listed on paperwork used as the recipient.  The goods were indicated on the fraudulent paperwork as having travelled through Italy, thus receiving a special tax exemption.  Once in Italy, the tobacco was unloaded and a false container with empty boxes continued on to Libya.  The cigarettes were resold in Italy on the black market.

http://www.eurojust.europa.eu/press/PressReleases/Pages/2018/2018-11-20b.aspx

16 CHARGED IN $76 MILLION DANISH FRAUD CASE

Reuters on 21st November reported that 16 people and 3 companies have been charged in Denmark with tax fraud and receiving stolen goods worth up to a combined $76 million, using a chain of companies to channel money with the purpose of tax avoidance.

https://uk.reuters.com/article/us-denmark-fraud/sixteen-charged-in-76-million-danish-fraud-case-police-idUKKCN1NQ0R9

3 SINGAPOREANS CHARGED OVER ALLEGED BRIBING OF INDONESIAN EMBASSY OFFICIAL

The Straits Times on 21st November reported that 3 Singaporeans, including an insurance agent, have appeared in court over their alleged roles in a bribery case linked to performance bond guarantees for Indonesian maids.

https://www.straitstimes.com/singapore/courts-crime/three-singaporeans-charged-over-alleged-bribery-of-indonesian-embassy

IMPLEMENTATION OF EU TAXATION SUBSTANCE REQUIREMENTS – GUERNSEY AND ISLE OF MAN

Dixcart in its briefing IN558 seeks to explain the legislation that has been designed to meet the high level of commitment made by the Crown Dependencies, in November 2017, to address the EU Code of Conduct Group’s concerns, that some companies tax resident in these Islands do not have sufficient ‘substance’ and benefit from preferential tax regimes.  It includes a flowchart for each jurisdiction to determine if a company meets the substance requirements.

https://dixcart.com/guernsey-and-the-isle-of-man-implementation-of-substance-requirements

CHINESE POLICE BUSTS CRIMINAL GANG SELLING 500,000 BOXES OF FAKE ‘DUREX’ – WITH SOME EVEN MADE FROM RECYCLED USED CONDOMS

Mail Online on 21st November reported that Chinese police have busted a criminal gang selling 500,000 boxes of counterfeit condoms worth an estimated £5.5 million, arresting 17 suspected gang members across Henan, Hebei and Zhejiang provinces.  Officials claimed the poorly-made condoms, which even included recycled rubber, presented a risk to public health.

https://www.dailymail.co.uk/news/article-6412479/Daylight-rubbery-Chinese-police-busts-criminal-gang-selling-500-000-boxes-fake-CONDOMS.html

ALBANIA’S GROWING POTENTIAL AS A SUPERYACHT DESTINATION

Superyacht News on 20th November carried an article asking why is the number of visiting yachts increasing and what infrastructure does the country have to offer?

http://www.superyachtnews.com/business/albanias-potential-as-a-superyacht-destination

PODCAST: RUSSIAN TROLL FARMS

In the latest TRACE podcast, Finnish journalist Jessikka Aro is interviewed.  She has investigated pro-Russia Internet trolls, their disinformation efforts and related financial crimes since 2014.   She has continued in spite of the barrage of death and rape threats designed to silence her.   Now, a recent verdict has brought some relief and vindication with sentences for three of the worst offenders for aggravated defamation and stalking.

https://www.traceinternational.org/bribe_swindle_or_steal

PERU SAYS EX-PRESIDENT GARCIA HAS SOUGHT ASYLUM IN URUGUAY

Baker McKenzie reported on 20th November that former Peruvian President Alan Garcia has sought asylum in Uruguay’s diplomatic mission hours after a judge retained his passport as part of a corruption probe.

http://www.riskandcompliancehub.com/peru-says-ex-president-has-sought-asylum-in-uruguay/

MONEYVAL COMMITTEE VISIT TO MALTA

The Council of Europe reported that a MONEYVAL carried out an on-site visit to Malta from 5th to 16th November.  The group met with the authorities responsible for Malta’s AML/CFT system (i.e. competent ministries, criminal justice and operational agencies, financial sector bodies and supervisors of businesses and professions with AML/CFT obligations).  The delegation also held meetings with a great number of private stakeholders (e.g. financial institutions, trust and company service providers, lawyers, real estate agents, notaries, casinos and remote gaming companies) and representatives from non-profit organisations.  An evaluation report will follow in due course.

https://www.coe.int/en/web/moneyval/home/newsroom/-/asset_publisher/zTE3FjHi4YJ7/content/council-of-europe-anti-money-laundering-and-counter-terrorist-financing-committee-visits-malta?inheritRedirect=false&redirect=https%3A%2F%2Fwww.coe.int%2Fen%2Fweb%2Fmoneyval%2Fhome%2Fnewsroom%3Fp_p_id%3D101_INSTANCE_zTE3FjHi4YJ7%26p_p_lifecycle%3D0%26p_p_state%3Dnormal%26p_p_mode%3Dview%26p_p_col_id%3Dcolumn-4%26p_p_col_count%3D1

HAVING NO REVIEW PROCESS FOR PROSCRIBED ORGANISATIONS IS ‘AFFRONT TO THE RULE OF LAW’

Police Professional on 20th November reported that, in a debate on the Counter Terror and Border Security Bill 2018, the former Independent Reviewer of Terrorism, criticised the lack of a review process to assess whether a group should remain proscribed.  In that role he had publicly reported that the Home Office had identified 14 proscribed groups that no longer met the statutory test for proscription.  However, a planned de-proscribing process was not put in place, and there has only been one successful de-proscription, the People’s Mujahideen of Iran.  He proposed an amendment to the Bill which was then rejected, a government minister saying that groups could apply to be removed from the list.

https://www.policeprofessional.com/news/no-review-process-for-proscribed-organisations-is-affront-to-the-rule-of-law/

VENEZUELAN EX-TREASURER ADMITS HE TOOK $1 BILLION IN BRIBES

The Wall Street Journal reported on 21st November that Alejandro Andrade, a former Venezuelan national treasurer who has pleaded guilty in the US to money laundering admitted he took bribes of over $1 billion from businessmen to allow them to conduct illicit foreign-currency transactions even as the once-oil-rich country’s economy collapsed.

https://www.wsj.com/articles/venezuelan-ex-treasurer-admits-he-took-1-billion-in-bribes-1542777736?mod=hp_major_pos5

HUNGARY INTRODUCES NATIONAL SECURITY VETTING OF FOREIGN INVESTORS

Bird & Bird has published an article saying that, as of 1st January, foreign investors are required to notify the competent minister of any acquisitions made in Hungary in regulated sectors.  Under the new rules, the Hungarian government may be able block foreign investments which they believe are in conflict with Hungary’s national security.

https://www.twobirds.com/en/news/articles/2018/global/hungary-introduces-national-security-vetting-of-foreign-investors

UK – EXPORTING WASTE: MEETING EU EQUIVALENT STANDARDS

On 21st November, the Environment Agency issued updated guidance and a look-up table of acceptable evidence that packaging or Waste Electrical and Electronic Equipment (WEEE) exporters can use to prove that overseas sites are operating to broadly equivalent standards to those operating in the UK.

https://www.gov.uk/government/publications/receiving-exported-waste-meeting-eu-equivalent-standards

UK: ‘ENABLER’ PROSECUTIONS ON THE WAY, MINISTER TELLS SOLICITORS

The Law Society Gazette on 21st November reported that the minister responsible, Ben Wallace, has said that law enforcement authorities are seeking out ‘enablers’ of money laundering for prosecution – warning that ‘not just the major criminals’ will be targeted.

https://www.lawgazette.co.uk/practice/enabler-prosecutions-on-the-way-aml-minister-tells-solicitors/5068392.article

EUROPEAN CENTRAL BANK TO CREATE DEDICATED AML WATCHDOG

Retail Banker on 21st November reported that ECB chief supervisor Daniele Nouy has said that the European Central Bank is set create new AML authority to augment anti-money laundering supervision over high-risk banks.  It is said that it will establish an AML office, which will procure and share relevant information from its supervisors and other authorities, and this office will set up and chair ‘an AML Network’ among Joint Supervisory Teams in charge of the banks whose business model leads to a high level of money laundering risks.

https://www.verdict.co.uk/retail-banker-international/news/ecb-create-dedicated-anti-money-laundering-watchdog

 DANSKE MONEY LAUNDERING WHISTLEBLOWER LABELS UK STRUCTURES A ‘DISGRACE’

Reuters on 21st November reported that the British man who sparked the Danske Bank money laundering crisis has said that the role of the UK is an absolute disgrace, and that Limited liability Partnerships (LLP) and Scottish Liability Partnerships (SLP) have been “abused for absolutely years”.

https://uk.reuters.com/article/uk-danske-bank-moneylaundering/danske-money-laundering-whistleblower-labels-uk-structures-a-disgrace-idUKKCN1NQ0LM

SWIFT LAUNCHES PAYMENT CONTROLS TO PREVENT FRAUD

Paypers on 21st November reported that the financial messaging system has introduced Payment Controls, an in-house solution to combat fraudulent payments, as well as to help strengthen customers’ existing security.  To further facilitate customer defenses, the secure financial messaging service SWIFT will introduce a new “stop and recall” capability, with the purpose of enabling banks to immediately stop and recall a payment anywhere in the chain.

https://www.thepaypers.com/digital-identity-security-online-fraud/swift-launches-payment-controls-to-prevent-fraud/775999-26?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+thepaypers%2FcfKW+%28The+Paypers+Headlines%29&src

MOZAMBIQUE UPDATE: AL-SUNNAH’S INCREASING STRENGTH FUELS CONCERNS

Control Risks on 21st November published an article saying that it has been a year since Islamist militant group al-Sunnah staged its first attack in Mozambique’s gas-rich Cabo Delgado province.  It says that the frequency of al-Sunnah attacks has increased.  The number of incidents spiked in the aftermath of a joint security force operation in May, and again in September after the Mozambique Defence Forces (FADM) upped its activity near the border with Tanzania.  Violence has also become more gratuitous.

https://www.controlrisks.com/our-thinking/insights/mozambique-update-al-sunnahs-increasing-strength-fuels-concerns

VANTAGE DRILLING SIGNS $5 MILLION FCPA SETTLEMENT LINKED TO PETROBRAS PROBE

Baker McKenzie on 21st November reported that the Cayman-based offshore oil rig operator has agreed to disgorge $5 million in a settlement with US regulators related to a corruption probe in Brazil involving Petrobas.  The company neither admitted nor denied the SEC’s findings.

http://www.riskandcompliancehub.com/vantage-drilling-signs-5-million-fcpa-settlement-linked-to-petrobras-probe/

ALLEGED NIGERIAN MAFIA GANG BUSTED IN CAGLIARI, SARDINIA

ANSA on 21st November reported that Italian police carried out several arrests and dismantled an alleged criminal ring linked to Nigerian mafia clan – the so-called ‘Calypso Nest’ gang is accused of human trafficking, exploitation of prostitution and drug dealing.

http://www.ansa.it/english/news/2018/11/21/alleged-nigerian-mafia-gang-busted-in-cagliari_4d8e3b79-9617-4054-b2e5-69b357707168.html

STRATEGIC SHIPPING ROUTES AT GROWING RISK FROM EXTREME WEATHER EVENTS: UK MILITARY

Hellenic Shipping News on 21st November reported that transport and trade routes, including chokepoints such as the Panama Canal, are likely to be disrupted, affecting global markets and supply chains.  Increasingly intense storms, sea level rises and longer periods of heavy rain will disrupt shipping.  Air transport is also likely to be affected, for example, the polar front jet stream (a current of fast-moving air in the upper atmosphere) will probably strengthen and, during the winter.

https://www.hellenicshippingnews.com/strategic-shipping-routes-at-growing-risk-from-extreme-weather-events-uk-military/

UK: AUTHORISED ECONOMIC OPERATOR (AEO) FOR IMPORTS AND EXPORTS

On 21st November, HMRC issued updated guidance about the benefits of AEO status, who can be an AEO and how to apply.  The blurb says that AEO status is an internationally-recognised quality mark that shows your role in the international supply chain is secure, and that customs controls and procedures are efficient and meet EU standards.  It’s not mandatory, but gives quicker access to some simplified customs procedures and, in some cases, the right to ‘fast-track’ your shipments through some customs and safety and security procedures.

https://www.gov.uk/guidance/authorised-economic-operator-certification#history

DBS CHECKS: GUIDANCE FOR EMPLOYERS

On 21st November, the Home Office released updated guidance on use of the Disclosure and Barring Service (DBS) – including how to apply, registering with the DBS and the code of practice.  An employer may request a criminal record check as part of their recruitment process. These checks are processed by the DBS.  When a check has been processed by the DBS and completed, the applicant will receive a DBS certificate.  DBS can’t access criminal records held overseas so a DBS check may not provide a complete view of an applicant’s criminal record if they have lived outside the UK.

https://www.gov.uk/guidance/dbs-check-requests-guidance-for-employers

OECD UPDATES GUIDANCE ON RESIDENCE/CITIZENSHIP BY INVESTMENT (CBI) SCHEMES

Accountancy Daily on 21st November reported that, following work with Panama, the OECD had up its guidance on such schemes that it says can be misused to hide assets offshore by escaping reporting under the OECD/G20 Common Reporting Standard (CRS).  OECD has updated its guidance to indicate where documentation should be regarded as potentially high-risk in the context of the Common Reporting Standard (CRS) due diligence procedures.

https://www.accountancydaily.co/cch_uk/cln/news_007416_oecd_guidance_residence_citizenship_investment_schemes

http://www.oecd.org/tax/residence-citizenship-by-investment-update-panama-november-2018.htm

MORE THAN A MILLION COUNTERFEIT CIGARETTES SEIZED AT BUSINESS IN LINCOLN

Lincolnshire Live on 21st November reported that more than a million counterfeit cigarettes have been discovered among various other illegal items after a raid on self-storage containers in Lincoln.  Also discovered in the containers was 71 kg of tobacco and 1 kg of cannabis.

https://www.lincolnshirelive.co.uk/news/lincoln-news/more-million-counterfeit-cigarettes-seized-2244844

TAXATION ECONOMIC SUBSTANCE REQUIREMENTS IN BERMUDA

On 21st November, Appleby published an article saying that, in keeping with its commitment to tax transparency, the Government of Bermuda is addressing proposals raised by the EU Code of Conduct Group regarding economic substance.  In November 2017, the Premier committed to addressing the proposals relating to economic substance for entities doing business in or through Bermuda and to pass legislation to implement any appropriate changes by 31st December this year.

https://www.applebyglobal.com/insights/insights-2018/economic-substance-requirements-in-bermuda.aspx

WCO RELEASES THE 2017 ILLICIT TRADE REPORT

On 21st November, the World Customs Organisation published the annual publication in which the WCO tries to quantify and map the situation concerning illicit markets in the following 6 key areas: Cultural Heritage; Drugs; Environment; IPR, Health and Safety; Revenue; and Security.

http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/enforcement-and-compliance/activities-and-programmes/illicit-trade-report/itr_2017_en.pdf?db=web

wco drugs type

drugs finding

Compare the above for drugs – where risk profiling was overwhelmingly the most important method for detection – with below for endangered species – where routine customs checks yielded the most results.

cites finding

However, for counterfeit goods etc, it was again risk profiling that was most effective.

ip finding

LAW ENFORCEMENT ACCESS TO FINANCIAL INFORMATION: EU COUNCIL ADOPTS NEGOTIATING POSITION

A news release from the EU on 21st November said that EU ambassadors had agreed the EU Council’s negotiating position on a Directive laying down the rules facilitating the use of financial and other information for the prevention, detection, investigation or prosecution of certain criminal offences – improving access to financial information by FIU and law enforcement authorities in order to strengthen the fight against terrorism and serious crime.  On the basis of this mandate, the Council Presidency will start negotiations with the European Parliament once the latter has adopted its position.

https://www.consilium.europa.eu/en/press/press-releases/2018/11/21/law-enforcement-access-to-financial-information-council-adopts-negotiating-position/

PANAMA – AN INTRODUCTORY GUIDE (FOR ME): UPDATED (AGAIN)

PANAMA

 The primary purpose of this paper is as a learning process, for me.  My intention was to seek to understand the general situation in Panama in respect of anti-money laundering/control of the financing or terrorism (AML/CFT), anti-proliferation and export and trade control measures, controls on proliferation financing (CPF), and related matters.

Any comments, additions and/or corrections are welcomed…

  1. INTRODUCTION AND GENERAL INFORMATION
  2. THE EU TAX BLACKLIST
  3. TAX AND THE OECD
  4. FATF EVALUATION ASSESSMENT
  5. NATIONAL RISK ASSESSMENT
  6. THE NATIONAL STRATEGY PLAN
  7. RELEVANT BODIES
  8. KEY AML/CFT/CPF LEGISLATION
  9. IDENTIFIED AML/CFT DEFICIENCIES
  10. WHAT ABOUT PROLIFERATION?
  11. RESIDENT AGENTS
  12. THE LEGAL SYSTEM
  13. THE LEGAL SYSTEM – THE ACCUSATORIAL CRIMINAL JUSTICE SYSTEM
  14. BRIBERY AND CORRUPTION
  15. THE COLON FREE ZONE
  16. THE PANAMA PAPERS
  17. ILLEGAL UNREPORTED UNREGULATED (IUU) FISHING
  18. KIMBERLEY PROCESS AND “BLOOD” OR “CONFLICT” DIAMONDS
  19. INDIRECT TAX
  20. HUMAN TRAFFICKING
  21. GLOSSARY

INTRODUCTION AND GENERAL INFORMATION

There are many factors that mean that Panama not only make it attractive as a jurisdiction to would-be money launderers, proliferators etc; but also make it essential that the country have comprehensive and effective AML/CFT controls, as well as export and other controls to combat proliferation and other trade-related risks.  These factors include –

  • its geographical location – to which one can add the next couple of factors;
  • being a major trade and logistics hub (not only because of the Panama Canal, though which about 5% of all world sea trade passes[1], but also because of the existence of 5 container ports[2] used for import, export, transit and transhipment of cargo)[3]. In 2016, Colón Container Terminal was the busiest port of transit with 56% of shipping, followed by Balboa (34%), Manzanillo (8%), and then Cristobal (2%)[4];
  • the Panama Canal – which contributes about $1 billion in tolls to the economy[5], and greatly boosting the use of the country as a logistics centre[6];
  • having the largest single shipping register in the world – the Panama Registry claims to be in charge of managing the world´s largest ship registry, with over 8,000 registered vessels which accounts 18% of the world fleet;
  • its status as major financial centre (especially in terms of business in and from Latin America);
  • its use of the US dollar as if its own[7];
  • the presence of the largest free port and free trade zone in the Americas at Colon[8] (being the largest of 12 such zones in the country); and
  • what have been described as favourable corporate and tax laws[9].

Panama remains regarded by the US State Department as a being a jurisdiction of primary concern in respect of money laundering and financial crimes.   According to the State Department, the release of the “Panama Papers” and the US Treasury’s designation of the Waked Money Laundering Organisation as a Specially Designated Narcotics Trafficker in 2016[10] exposed and underlined vulnerabilities in Panama’s financial transparency regime.

If further evidence of vulnerability was required, in 2017, Panama agreed a $220 million settlement with Brazilian construction company, Odebrecht, which had admitted to paying $59 million in bribes in the country in 2012-14 to secure public works projects[11].  The settlement included a $100 million penalty for using the banking system for illicit activities.  It was also said that Panamanian officials were investigating 43 people related to projects contracted during the last 3 presidential administrations.

It did not help the country’s reputation that the former president, Ricardo Alberto Martinelli Berrocal, who held office 2009-2014.  In January 2015, the Supreme Court ordered an investigation of Martinelli over alleged corruption, and his immunity from prosecution (as leader of a political party) was lifted and in due course an arrest warrant was issued and he was accused of embezzling government money to fund illegal surveillance activities.  He had fled to the US, but was eventually extradited from Florida in June 2018[12].

In its Country Report on Panama in August 2015[13], the International Monetary Fund (IMF) said that the most immediate priority for Panama was to finalise the process of enhancing financial integrity, and that monitoring, supervision and regulation of the financial sector need to see continued enhancement.  To these ends, it said, it was important that Panama finalise the Action Plan agreed with the OECD’s Financial Action Task Force (FATF), which had identified “strategic AML/CFT deficiencies”, though it noted that the passing of the new AML law in 2015 was an important step.

Further impetus for improvements to the country’s AML/CFT regime came in the form of an impending review by GAFILAT, the regional FATF-style monitoring body, which was scheduled to take place in late 2017, and would include use of the new “effectiveness” ratings (meaning that the review would not only look at technical compliance with FATF Recommendations, but also at evidence of how effective controls were).

In late 2015, Panama passed comprehensive legal reforms concerned with AML, with further legislative and administrative changes continuing.

Its first national risk assessment (NRA), published in January 2017[14], identified free trade zones (of which there are 12), real estate, construction, lawyers and banks as being of “high risk”.  In the light of this, in May 2017, the government published a National Strategy Report outlining 34 strategic priorities for 17 government institutions, intended to improve the country’s AML/CFT regime and running to 2019.

As is the case with many “offshore” financial centres, most of the money laundering in Panama is likely to primarily originate with illegal activities elsewhere – with drug trafficking, tax evasion[15] and smuggling having been identified by the US State Department as the most common or likely.

However, it is recognised that Panama is a transhipment point for drugs due to not only its geographical location (particularly bordering Colombia[16]), and the large amount of air and sea traffic transiting the country.

The Colon Free Zone (CFZ) is the second-largest free trade zone in the world[17].  In 2017, the NRA published by the Ministry of Economy and Finance acknowledged that Panama’s free trade zones were prone to facilitate money laundering and other crimes[18].  It was said that the weaknesses of the CFZ were highlighted throughout the analysis carried out by the Ministry through the NRA[19].

Law firms and corporate service providers (CSP) in Panama are seen as key gatekeepers, but in the past at least were seemingly subject to less than stringent oversight and control.  The current International Narcotics Control Strategy Report from the US State Department[20] says that the use of nominee shareholders and directors, thereby helping to mask the true ownership and control of corporate vehicles, is still prevalent.  That said, Panama was said to have instituted comprehensive customer due diligence (CDD) and suspicious activity report (SAR) requirements.

As mentioned, Panama is a member of GAFILAT[21], the Financial Action Task Force of Latin America, what is termed a “FATF-style regional body” (FSRB).  In 2016, a public statement from FATF said that the organisation welcomed Panama’s significant progress in improving its AML/CFT regime and noted that Panama had established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2014[22].  As a result, it was no longer subject to ongoing monitoring, but it was said it would continue to work with GAFILAT to address the full range of AML/CFT issues identified in its mutual evaluation report of 2018.

THE EU TAX BLACKLIST

Panama was removed from the EU tax blacklist[23] in January 2018[24] following “commitments made at a high political level to remedy EU concerns”[25].  The list was of jurisdictions that were regarded as non-cooperative by the EU, and they were assessed including criteria including tax transparency and implementation of “anti-BEPS” measures[26].

As part of this commitment, the government accelerated the implementation of several reforms to strengthen its tax system, and it signed various international agreements on the exchange of tax information[27].

In January 2018, Panama signed up to the Common Reporting Standard (CRS)[28], a move described by the OECD as “reaffirming its commitment to the automatic exchange of financial account information”.  The CRS requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.  It sets out the financial account information to be exchanged, the financial institutions that are required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.  According to OECD information, as at the date of this paper, Panama had enacted the necessary primary and secondary legislation, but had not yet issued guidance on implementing CRS[29].

TAX AND THE OECD

Panama has a number of special economic zones (SEZ) to attract foreign businesses and to promote innovation, and where special tax reliefs and benefits apply.  The most important is the CFZ, Panama Pacifico and Cuidad del Saber (City of Knowledge) – in these 3 zones, there are over 2,000 businesses and 43,000 workers (2.4% of total employment in the country)[30].

In 2018, Law No. 654 inter alia added a new paragraph to the Fiscal Code requiring companies established in SEZ, in an oil free trade zone, or operating as a multinational company headquarters (SEM) to apply transfer pricing rules to dealings with related parties – previously the OECD Guidelines were to be considered the technical reference for purposes of interpreting of the country’s transfer pricing rules and provisions.  Transfer pricing has been described by the OECD as the allocation of profits for tax and other purposes between parts of a multinational corporate group[31].  The current OECD international guidelines are based on the “arm’s length” principle – that a transfer price should be the same as if the companies involved were indeed two independent companies, not part of the same corporate structure.  The arm’s length principle (ALP) is in Article 9 of the OECD Model Tax Convention and is the framework for bilateral treaties between OECD countries, and many non-OECD governments.

In its 2018 peer review report, the OECD said that Panama was making progress in addressing base erosion and profit shifting (BEPS).  BEPS means tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.  Under the OECD, over 100 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS[32].  The OECD said that anti-avoidance measures still needed strengthening in Panama, to prevent aggressive tax planning and enable the collection of a fair amount of tax by or for the other countries affected.  Panama signed the BEPS Multilateral Convention in 2018.

In 2016, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes rated Panama as “non-compliant” for the purposes of the international standard for the exchange of information.  After taking steps to remedy this, a “fast track” reassessment in 2017 resulted in an upgrade of its rating to “Largely Compliant”.

In 2016, the country had committed to implementing the international standard of Automatic Exchange of Financial Account Information (AEOI)[33], known as the Common Reporting Standard (CRS), and signing up formally to the necessary instrument[34] in January 2018[35] – with this expected to see the first such exchanges later in 2018[36].

Also in 2016, Panama signed the Convention on Mutual Administrative Assistance in Tax Matters, thereby greatly extending its tax information exchange network.  The Convention itself came into effect in 2017.

FATF EVALUATION ASSESSMENT

Panama is a member of GAFILAT, the regional FATF-style regional body, which assesses Panama against the 40 Recommendations issued by FATF and which “set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction” and thereby establish an international standard against which countries can be measured[37].

Since 2013, FATF has also evaluated jurisdictions against 11 “Immediate Outcomes” to assess the effective implementation of the Recommendations and the overall robustness and effectiveness of the control regime in that jurisdiction.  The 11 Immediate Outcomes are included in the methodology laid down for carrying out of assessments[38]

Assessments are undertaken by means of mutual evaluation, a type of peer review using experts selected from other member countries of FATF or the regional body, and the results published in mutual evaluation reports (MER), both by the regional body and by FATF itself.  The experts carry out an on-site visit and also call for documents and information from the country being assessed, and enter into an ongoing dialogue with the country up to the time of the report being finalised.  The results of the assessments undertaken by the regional bodies are moderated and approved by FATF, and the markings published by FATF in a schedule of results for all jurisdictions that have been assessed.

After the previous MER in 2014, the International Cooperation Review Group (ICRG) of FATF placed Panama in its enhanced follow-up process, and GAFILAT also placed the country under an enhanced follow-up process (which had ended by the time of the next on-site visit in 2017).  The role of the ICRG is to monitor and report on “high risk” jurisdictions.  Referral to the ICRG is normally based primarily on the results of the jurisdiction’s MER, and jurisdictions whose MER reveals a significant number of key deficiencies are referred to the ICRG.  Jurisdictions considered to be falling short may be given a short window (usually 12 months) to demonstrate improvements, and may be required to prepare and submit an action plan and to engage in meetings with FATF representatives, as well providing high-level political commitment to remedying any identified shortcomings.

The latest MER for Panama was published in 2018[39], this followed an on-site visit by a team of evaluators from GAFILAT in May 2017.  According to that MER, Panama was deemed “Compliant” for 10 and “Largely Compliant” for 22 of the FATF 40 Recommendations[40].

However, Panama only scored “Substantially Effective” for 2 of the 11 Immediate Outcomes, and failed to score “Highly Effective” for any.

One of the main risks facing Panama in terms of income from criminal activities was said to be the receipt of funds or other financial assets resulting from tax crimes committed abroad.  This risk had not been considered in the NRA and in the MER GAFILAT said it was important to point out that tax crimes are not criminalised as a predicate offence for the purposes of money laundering in Panama, which (naturally enough) significantly affects the possibilities for prevention and investigation.  The National Strategy Plan included criminalising tax crimes as one of its most important action points, and the MER identified this step as a priority action.

Illicit drug trafficking was seen as the illicit activity committed in the Panamanian territory which was most related to money laundering in the country, with the country being seen as primarily a transit point – not a production base – for drugs heading chiefly to North America.

The other main internal threats relating to money laundering were seen as being corruption[41], financial crimes and crimes against intellectual property[42].

The MER said a priority was for Panama to pay special attention to the free zones sector to prevent measures of improper invoicing of goods[43] or other illegal foreign trade operations[44].   It also said that measures must be taken to control the use of cash in free zones, as well as in the real estate and construction sectors.

The MER called for greater attention to be paid to the risks of terrorism financing and proliferation/proliferation financing[45], and for more effort on raising the awareness of the risks.

However, as was the case with the NRA, the MER noted that tax crime not being a predicate offence for money laundering enhanced the risks in some vulnerable sectors, such as the financial sector, the corporate sector and the free zones.  In addition, the MER said that the current control mechanisms of operation of the corporate service sector were not considered enough to mitigate the risks associated to the operation of Panamanian corporations and private interest foundations, especially in the offshore sector[46] (something I think was underlined by the Panama Papers).

NATIONAL RISK ASSESSMENT

FATF regards a national risk assessment (NRA) that identifies, assesses and understands the money laundering and terrorism financing risks facing a jurisdiction as an essential part of developing a national AML/CFT regime[47].  It is also something that an evaluation team would expect the jurisdiction to have undertaken, and it is referred to in the Recommendations (in particular recommendation 1[48], and would inform the rating of the Immediate Outcomes.

Panama’s NRA[49] was approved in December 2016 by the National Commission against Money Laundering, TF and Financing the Proliferation of Weapons of Mass Destruction[50] (CNBC), and the same month submitted to the cabinet and President.  It was formally published in January 2017[51], and duly taken into account by the GAFILAT review team.

The NRA identified that the main risks from money laundering are derived from illicit financial flows from abroad which may be placed in Panama and which are associated with drug trafficking.  Other offences related to organised crime, smuggling and other offences related to international trade.  In respect of internal threats, drug trafficking, corruption, financial crimes and crimes against intellectual and industrial property were identified as the main offences.

The NRA determined that Panama has a vulnerability to the receipt into the country of the proceeds obtained from predicate offences committed abroad and that the legal services and legal arrangements existing in Panama may be misused abroad for money laundering[52].

The NRA also put the terrorism financing risk as “low”, because Panama does not have individuals or terrorist organisations and does not maintain relations with countries at greater risk of terrorism[53].  There were said to be (and this point was endorsed in the MER) mechanisms in place to prevent the use of the financial system for terrorist financing and to implement targeted financial sanctions related to terrorist financing and proliferation.

However, the NRA evaluated mainly terrorism risk and not the terrorist financing risk, and it was said by GAFILAT in the MER that both financial institutions and DNFBP[54] did not fully understand risks of, or from, terrorist financing.   In the 2018 MER, GAFILAT called for greater attention to be paid to the risks of terrorism financing and proliferation/proliferation financing, and for more effort on raising the awareness of the risks.

One of the main risks identified by the NRA had been in the real estate sector, and this was identified as a top priority in the on-site monitoring programme of the Intendencia (see list of relevant bodies below).

Another sector identified in the NRA as high-risk were companies that operate in the Colon and other free zones, with large amounts of cash said to circulate in the Colon zone.

Another high-risk area was the legal sector[55], particularly where lawyers act as resident agents[56].  At the time of the 2017 evaluation visit by GAFILAT only 522 such lawyers/agents were registered with the FIU out of a total of 4,216.  A resident agent is required to identify the client (including ultimate beneficial owner), obtain information about the purpose for which the legal entity is created, and provide the competent authorities with the required information (such as to combat money laundering and terrorism financing and any other illegal activity[57]).  However, the MER concluded there was some doubt or confusion over what, or whether at all, the resident agent had to carry out deeper or follow-up proactive verification – such as to detect subsequent changes affecting or different from that information initially relied upon[58].

The NRA evaluated the risks of companies used for illegal purposes, concluding that the sector was vulnerable and considered of high risk.  In particular, the NRA established that there is “a vulnerability for companies without activities in the Republic of Panama to be used in other countries for money laundering or TF purposes”[59].

The MER also pointed out that the NRA did not consider one of the main risks currently experienced by the country in terms of income from criminal activities, which is the receipt of funds or other financial assets derived from tax crimes committed abroad – these not being a predicate offence for money laundering in Panama.  Furthermore, it said, the NRA did not go far enough into the analysis of existing risks in each of the different activity sectors identified as vulnerable[60].

According to the conclusions of the NRA, the risks of some types of non-profit organisation (NPO) being used for money laundering or terrorism financing, are low, and (as already mentioned) that terrorism threats are mainly found abroad, and that the NPO in Panama, in general, do not send resources abroad, but raise them for conducting activities within the country.  In addition, no cases were identified where an NPO had been used for terrorist financing purposes.  Panama did not include NPO within the range of reporting institutions, under Law No. 23, 2015, and did not identify any subgroup of NPO with having a higher risk of abuse for the terrorist financing[61].   The body for Supervision, Monitoring and Evaluation Department of Non-Profit Organizations and Private-Interest Foundations (see the list of relevant bodies below) is in charge of supervising the operation of the NPO, collecting information on directors and financial statements every year, and re-evaluating the sector for possible risks and vulnerabilities regarding terrorist activities.

THE NATIONAL STRATEGY PLAN

The National Strategy for Combating Money Laundering, Terrorist financing and the Proliferation of Weapons of Mass Destruction[62] was jointly developed by the Panamanian government and the IMF.  It was formally approved in May 2017.

One of the Plan’s lines of action was for tax crimes to be criminalised (which was also highlighted as a priority action by the 2018 MER), this being an obvious gap in the law, and identified as a source of vulnerability to the country and its finance and business sectors.

One point of note was that the Plan labelled the vulnerability risk of registered agent lawyers as “low”, although the sector was identified as “high-risk” in the NRA, and evidence of the Panama Papers would appear to support the latter assessment.

The Plan established the Strategical Priorities of the country under 5 pillars –

  • Transversal;
  • Institutional;
  • Prevention Component;
  • Detection and Intelligence Component; and
  • Investigation and Criminal Justice Component.

Based on these 5 pillars, an Action Plan was drawn up, with various objectives set and actions planned up to December 2020.

The National Commission against Money Laundering, Terrorism Financing and Financing the Proliferation of Weapons of Mass Destruction acknowledged the NRA, and it approved the National Strategy.  The Commission allows for the co-ordinating of the activities of authorities with jurisdiction on prevention matters, and it was under its aegis that the National Strategy was drafted.  As described in the National Strategy, the Commission is charged with –

  • approving national risk strategies for money laundering, terrorism financing and countering proliferation of WMD;
  • taking the necessary measures to mitigate national risks, manage resources and adopt decisions on execution, in addition to monitoring the action plan; and
  • establishing policies and ensuring co-ordination on issues involving money laundering, terrorism financing and countering proliferation of WMD.

RELEVANT BODIES

There are a number of law enforcement, regulatory and supervisory bodies that one need to be aware of when considering the situation in Panama.

There are 4 supervisory bodies for the financial sector – SBP, SMV, SSRP and IPACOOP.

SBP Bank Supervisor of Panama (Superintendencia de Banco de Panamá).

Its supervision includes remittance and currency exchange businesses, although Panamanian law regards these as “non-financial” businesses[63], as well licensed banks (92 at the time of the GAFILAT evaluation), issuers or processors of debit cards, credit and prepaid, payment and electronic money.  Remittance houses and savings and housing loan corporations, supervised by the SBP, are authorised by the Ministry of Commerce and Industry (MICI).

Supervises – banks and banking groups; fiduciary companies; financial companies; financial leasing companies; factoring companies.

SMV Supervisor of the Securities Market (Superintendencia del Mercado de Valores).

Grants licences to the securities companies, investment companies, advisors and

investment managers.

Supervises – self-regulated organisations; securities firms; investment managers; pension fund administrators; disability fund managers

SSRP Panama Supervisor of Insurance and Reinsurance (Superintendencia de Seguros y

Reaseguros de Panamá).

Responsible for insurance and reinsurance brokers, as well as insurance loss adjusters etc, insurance agents, executives and managers of companies’ insurance companies (captive insurance), and related businesses.

Its main objective is to protect contracting parties and to promote an inclusive insurance market by performing duties and activities that ensure the solvency and liquidity of insurance companies and the performance of activities regulated in compliance with this law and its regulations.

Supervises – insurance and reinsurance companies; insurance brokers (natural or legal persons); reinsurance brokers (natural or legal persons); insurance adjusters or inspectors; insurance agents (natural or legal persons).

IPACOOP Panamanian Autonomous Cooperative Institute (Instituto Panameño Autónomo

Cooperativo).

Responsible for granting legal status to co-operatives and credit unions, and, if necessary, to intervene and liquidate them for breach of AML/CFT regulations.

Supervises – Credit Unions; Mulitple or Integral Services Cooperative that are involved in saving or credit activities; Other cooperative organizations conducting financial intermediation.

 

Other relevant bodies include –

INTENDENCIA Supervisor and regulator of non-financial reporting institutions (DNFBP) and activities (Intendencia de Supervisión y Regulación de Sujetos Obligados No Financieros).

Responsible for a variety of DNFBP, including –

companies in the Colon Free Zone and the Agency of Panama Pacifico, Zona Franca Baru;

casinos, gaming, gambling and betting system organisations (including online);

developers, real estate agent and broker of real estate, when they are involved in transactions for clients concerning the purchase and sale of real estate;

companies in the construction industry;

pawn shops;

companies involved in marketing of precious metals and gemstones;

the lottery of charity;

savings and loans institutions for housing;

money exchanges; and

companies engaged in the buying and selling of new and used cars.

FIU The Financial Intelligence Unit[64] (FIU, in Spanish UAF)[65].

Serves as the national centre for the collection and analysis of financial information related to money laundering/terrorist financing/proliferation crimes, for receiving and analysing Suspicious Transaction Reports (STR) and Cash (and cash equivalents) Transaction Reports (CTR), which are submitted using an electronic platform[66] that allows interaction with the reporting institutions to offer feedback[67] on the quality of the report.   Strict confidentiality applies to STR and their contents can only be disclosed to the Public Prosecutor’s Office (PPO), criminal investigation agents and judicial authorities.

The FIU also receives information from the National Customs Administration (ANA) on travellers’ declarations related to the transportation of money, securities or documents for more than $10,000 (or its equivalent in another currency).

It issues financial intelligence reports with added value which are disseminated by the PPO.  Once the analysis is completed, an intelligence report is prepared and evaluated by a committee, together with an assigned analyst and then it is submitted to the General Director of the FIU, who can decide whether to carry out further inquiries or communicate the results of the analysis to the PPO.  The FIU can also spontaneously communicate the result of its analysis through its intelligence reports to the PPO and other criminal investigation agents or jurisdictional authorities where it is suspected that money laundering, terrorist financing or proliferation activities have been, or are being, carried out.  However, it is normally a working group meeting between the FIU and the PPO that marks the beginning of an investigation.

However, the 2018 MER found that the number of reports disseminated (by the FIU and other competent authorities) was low.  It also noted a lack of feedback to the FIU on whether reports it had prepared, or assistance it had rendered, had been of benefit.

The FIU also provides technical assistance at the request of the PPO or other competent authorities.

The 2018 MER noted that there was a low level of STR in sectors identified in the NRA as having high vulnerability to money laundering and terrorist financing (e.g. attorneys acting as resident agents[68], the real estate sector and those in the Colon Free Zone.

The FIU is a member of the Egmont Group of FIU[69], and is thus able to make use of that organisation’s system of secure, confidential requests for assistance and information.

The Ministry of Foreign Relations receives the updated lists of the United Nations Security Council referring to natural or legal persons designated for proliferation, these are communicated to the FIU (and CSN).

The FIU may exchange financial intelligence information with such countries whose FIU is member of the Egmont Group, or with such countries with which it has signed a MoU[70]; it is also able to exchange such information on the basis of reciprocity[71].  The FIU is also party to the Regional MoU for combating money laundering and the financing of terrorism among the different FIU of Central America, Colombia and Dominican Republic, as well as to the MoU of FIU with the 17 other GAFILAT states.

The website of the UAF includes FAQ, which answer such questions as what are predicate crimes, and what are the functions of the unit[72].

MONEY LAUNDERING AND FINANCING OF TERRORISM UNIT A specialised entity created by the Office of the Attorney General in 2016 to support prosecuting attorneys in complex financial investigations, developing proprietary investigations and helping with money laundering criminal investigation strategy.  The Unit also has a co-ordination mission aimed at strengthening the execution of investigations by means of inter-institutional groups with the participation of the Judicial Investigation Division, the FIU and the Institute of Forensic Medicine and Forensic Sciences.
PPO The Public Prosecutor’s Office in the Attorney General’s Office.

Disseminates financial intelligence reports prepared by the FIU.  It also undertakes investigations.

It is the authority in charge of properly investigating money laundering, predicate offenses and terrorist financing.

A specialised unit for money laundering and terrorist financing has been created to support the PPO, with analysts and appropriate technical support: the ML/TF Specialized Unit[73].  Its support staff include financial, accounting and IT analysts who collaborate on the financial analysis.

The PPO also works with the support of the Department of Judicial Investigation (DIJ) of the National Police (see below), which is dedicated to investigating money laundering and terrorist financing.

The PPO applies for court orders retraining property or other assets.  Ultimately, such property may be ordered to be disposed of by the Ministry of Economy Finance.  Property which is also evidence remains in the custody of the PPO, but other property is the responsibility of the Department of Administration of Seized Property.

The PPO also acts as the country’s central authority for mutual legal assistance requests, co-ordinating with the Foreign Office, under several international treaties.  However, Panama had established several central authorities according to the nature of the offence and the convention involved, to provide legal assistance in criminal matters, and in some cases the responsibility lies with the Ministry of Government, with prior delivery to the PPO, and in other cases with the Foreign Office.

The PPO has a special unit destined to fulfil functions in international co-operation matters, which prioritises and monitors how assistance requests are dealt with, with the objective that they will be answered in a timely manner.

DEPARTMENT OF ADMINISTRATION OF SEIZED PROPERTY This Department reports to the Ministry of Economy and Finance and is involved where the property involved in cases under the former legal system (i.e. that of prior to the transition to an accusatory system similar to that of the US – see more detail on this below).  It is responsible for control of all restrained and seized property which is not considered as also being evidence (in which case remains in the custody of the PPO).  It would arrange any disposal, such as by auction, of any condemned property.
DIRECTORATE OF ADMINISTRATION OF SEIZED PROPERTY This Directorate was created only in 2015 and it also reports to the Ministry of Economy and Finance.  It is involved in cases arising under the post-2016 accusatory legal system.  Where any monies and securities are restrained or seized these would remain in the custody of the financial institution in which it was found, accruing interest, but monitored and controlled by this office.
ANA National Customs Authority (Autoridad Nacional de Aduanas).

It controls and supervises customs operations and the flow of goods entering, remaining in or exiting the country and those goods covered by permanent or temporary customs regimes, customs warehouses, free trade zones and duty-free stores.

One of its roles involve handling travellers’ declarations related to the transportation of money, securities or documents[74] for more than $10,000 (or its equivalent in another currency).

Under Panama law[75], money falls under the definition of “merchandise”, thus allowing its seizure alongside any goods or vehicle used to transport it.  Non-declaration or false declaration involving cash etc of over $10,000 in value (in whatever denomination) at importation is also regarded as a form of customs fraud.  A written declaration system is established for all travellers, who must declare if they carry more than $10,000.

In customs matters, the most intensive co-operation is with Colombia, mainly, and with Costa Rica, these countries sharing land borders with Panama.  Colombia is the country in which a greater exchange and co-ordination takes place.

There is also a co-operation programme with US, mainly aimed at controls on containers and merchandise in transit at the Panamanian ports, and that have the US as their final destination (there is a free trade agreement in place between the US and Panama).   The US has also provided assistance and support for the acquisition of equipment that allows conducting non-intrusive inspections of shipments to detect radioactive materials.

The ANA undertakes risk-based checks of shipments in transit through the country’s ports.

CNBC National Commission against the laundering of capital[76] (La Comisión Nacional contra el Blanqueo de Capitales); aka National Commission against Money Laundering, Terrorism Financing and Financing the Proliferation of WMD (Consejo Nacional Contra el Blanqueo de Capitales, Financiamiento del Terrorismo, y de la Proliferación de Armas de Destrucción Masiva)[77].

A council chaired by the Minister of Economy and Finance, with 2 other ministers, the Superintendent of banks, prosecutor general from the PPO, the director of the FIU and the President of the Commission of economy and Finance of the National Assembly[78].  It also has a technical secretariat attached, which has technical and administrative functions.  It approves the national risk strategy to prevent money laundering, manages the resources available and identifying money laundering national risks.  It also follows up the National Plan to prevent money laundering and establishes policies for the prevention of money-laundering offences.

SENAFRONT National Border Control Service (Servicio Nacional de Frontera).

This operates at the land border crossings with Costa Rica and Colombia.  They are an armed, paramilitary force which often saw clashes with FARC.  It is a specialised and permanent police force structured and organised to guard the terrestrial borders of Panama.

CSN The National Security Council (Consejo de Seguridad Nacional)

This was created in 2010 as a consulting and advisory body for the President on national security and defence issues.  Within its scope are terrorism and terrorism financing, as well as the investigation of corruption, organised crime, drug trafficking and migrant smuggling.  The Counter-Terrorism Department and the Prevention Committee against Terrorism and its Financing (see below) is part of the CSN.

The CSN also has representation on the Prevention Committee against Terrorism (see below).  The Counter Terrorism Department of the CSN was established in 2016 and is dedicated to carrying out intelligence tasks on individuals or legal persons that are suspected of being related to terrorism and terrorist financing.

The Ministry of Foreign Relations receives the updated lists of the UN Security Council referring to natural or legal persons designated for proliferation reasons, these are communicated to the CSN (and the FIU).

COUNTER-TERRORISM DEPARTMENT AND THE PREVENTION COMMITTEE AGAINST TERRORISM AND ITS FINANCING Departamento de lucha contra el terrorismo y el comité de prevención contra el terrorismo y su financiamiento.

This is part of the CSN and its main function is to collect and disseminate intelligence relating to terrorism, terrorist financing or the proliferation of WMD.  It also compiles reports that are submitted to the Prevention Committee against Terrorism (see below).

 

PREVENTION COMMITTEE AGAINST TERRORISM Comité de prevención contra el terrorismo.

This committee involves representatives from the CSN, FIU, PPO, the office of the President, and other state entities.  It reviews reports prepared by the Counter-Terrorism Department and the Prevention Committee against Terrorism and Financing, makes recommendations for decisions taken by the CSN, evaluates requests for inclusion on UN sanctions lists and exchanges information with other state bodies in cases of suspected terrorist financing.

GIA The Inter-institutional Anticorruption Group (Grupo Interinstitucional Anticorrupción).

This was created in 2016[79] to promote preventive actions against acts of corruption and organised crime within public security organisations.  It reports to the Executive Secretariat of the CSN.

DIJ This is the Department of Judicial Investigation (Departamento de Investigación Judicial) of the National Police (see below).
POLICE The National Police (Policía Nacional).

The PPO works with the support of the Department of Judicial Investigation (DIJ) of the National Police, which is dedicated to investigating money laundering and terrorist financing.   At the time of the GAFILAT evaluation Panama was in the process of improving its capabilities to conduct parallel financial investigations, with the creation of specialised units in the PPO and the Police.

MINGOB The Ministry of Government (Ministerio de Gobierno)[80].

MINGOB is concerned with issues relating to the internal government and internal security.  It determines government policies and plans, co-ordinates, directs and executes administrative control of the provinces and indigenous territories, respecting their cultural heritage and promoting their development.

It has the power to grant and suspend the legal status of non-profit organisations (NPO) and keeps an updated list of all NPO[81].  The Supervision, Monitoring and Evaluation and Private-Interest Foundations Department of MINGOB has the role of verifying the legal status of most NPOs and supervising them based on risk, through off-site supervision or on-site visits.  This Department is responsible for supervising the operation of the NPO, collecting information on the boards of directors and financial statements every year, and re-evaluating the sector for possible risks and vulnerabilities regarding terrorist activities.

The Office for the Execution of Mutual Legal Assistance Treaties and International Cooperation of the MINGOB is an additional central authority for bilateral treaties, as well as the Inter-American Convention on Mutual Assistance in Criminal Matters and the Treaty of Mutual Legal Assistance in Criminal Matters between the Republics of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama.

MICI Ministry of Commerce and Industry (Ministerio de Comercio e Industria) is the authority that grants licenses to financial companies, leasing companies and factoring companies[82].  Remittance houses and savings and housing loan corporations, supervised by the SBP, are authorised by MICI.  It is also responsible for supervising the search for and exploitation of mineral resources[83] and compliance with foreign trade policy.
JCJ Gambling Control Board (Junta de Control de Juegos)[84]

The Board operates under the Minsitry of Finance and Economy and registers casinos and other playing of games of chance.  However, monitoring of this sector was transferred from the JCJ to the Intendencia.

MIRE Ministry of Foreign Affairs (Ministerio de Relaciones Exteriores).

The authority in charge of co-ordinating the communications with the Sanctions Committees derived from the UN SCR 1267/1988/1989, and the designations made by foreign countries, in accordance with the terms of the UN SCR 1373; and is in charge of reporting, through diplomatic channels and upon deliberation of the CSN, to the respective Committee of the UN Security Council, and receiving response from the latter, to subsequently report to the CSN and the FIU.  MIRE is also responsible in respect of proliferation sanctions.

PGN Office of the Attorney General of the Nation (Procuraduría General de la Nación).

It prosecutes crimes and other violations of the law, and monitors the professional conduct of government officials.  The Office is responsible for all criminal cases, unless involving the President or judges of the Supreme Court.

It is the central authority in Panama for the UN Convention against Transnational Organized Crime, the UN Convention against Corruption and the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.

NCST National Council on Secure Trade.

Comprised of representatives from several ministries[85]; its roles include approval of the strategic trade control regulations (i.e. export and trade controls including counter-proliferation; this being its main role), revoke licences, and manage inclusion on the national register created under Decree 81 of 2017.

TCSTT Technical Committee on Secure Trade and Transport.

Comprised of members from the same ministries as the NCST, plus a representative of the Panama Canal Authority (PCA)[86]; its roles are to provide technical and administrative support, chiefly by drafting and updating the strategic trade control regulations and the National Control List, and developing and maintaining the licensing process. The latter role includes making decisions on the granting of licences.

KEY AML/CFT/CPF LEGISLATION

“Money laundering” was defined in Articles 254 to 259 of the Criminal Code; in accordance with Article 254, the crime of money laundering is committed by whoever whether “[…] personally or through another person, receives, deposits, trades, transfers or converts monies, securities, property or other financial resources, reasonably foreseeing that they come from activities related … offences against …with the purpose to hide, disguise or conceal its illicit origin, or whoever helps evade the legal consequences of such offences, will be punishable by 5–12 years in prison.  Various inchoate, ancillary, aiding and abetting offences etc are also covered.

The Criminal Code also contains specific provisions for public officials or candidates to public offices: the use of resources from illicit origin for the financing of political campaigns, or of any nature, is criminalised.

Predicate offences are expressly mentioned in Article 254 of the Criminal Code (though not, at the time of the MER, tax crimes).

The government had identified combating money laundering as one of 5 goals in its 5-year National Drug Control Strategy in 2002, and had established the Unidad de Análsis Financiero (UAF)[87], the country’s FIU.  In 2016, the FIU launched a website for online submission of STR and CTR.  The FIU also saw its budget tripled in2015.

Law 23 of 2015[88] criminalised money laundering and set AML compliance requirements for entities in 31 sectors.  It also classified as crimes additional activities related to money laundering and financing of terrorism and also creating conditions for improved judicial assistance and co-operation with foreign institutions.  The changes were part of the action plan that allowed Panama to be removed from the FATF “grey” list.

The 2015 Law also established the formation of the national co-ordination system which comprised –

  • the National Commission against Money Laundering, the Financing of Terrorism and the Financing of the Proliferation of Weapons of Mass Destruction;
  • the Financial Analysis Unit (the FIU, or UAF) for the Prevention of the Crime of Money Laundering and Financing of Terrorism; and
  • the Supervisory Institutions.

The Intendencia is responsible for supervision and regulation of those in the non-financial sector subject to controls, and oversees the AML compliance of over 14,000 DNFBP, including in the CFZ, as well as, since 2017, MSB and money transmitters.  Stricter oversight controls were imposed on non-profit organisations and foundations from 2017 through MINGOB.

Legislation introduced in 2015 saw the issue of bearer shares was banned in 2016, and those already in use were made subject to requirements that the companies involved had to appoint an authorised custodian (this having to have been done by December 2015) and maintain strict controls over the use of them.  The law also permitted the conversion of bearer shares into nominative shares.

According to the MER, all DNFBP have an authority that registers them or that grant an activity permit, and without such registration or permission, it is not possible for a DNFBP to continue its activity.  The Intendencia has an MoU with all the entities that register or authorise the operation of the DNFBP.

All banks and trust companies must have a money laundering committee comprised of board members.

With effect from June 2018, Executive Decree 122[89] required the automatic sharing of tax-related financial information with 33, primarily European, states.  The measure followed international reporting standards laid out by the OECD Common Reporting Standards (CRS) and approved in Panama in 2016.

On 14th September 2018, 2 additional measures dated 21st August and issued by the Superintendency of Banks of Panama took effect –

  • Firstly, the Prevention Agreement for Other Financially Obligated Subjects No. 002-2018 established the registration process of “exchange offices”[90]. This applied to all natural or legal persons that provided services for the purchase and sale of coins, banknotes or other monetary instruments, inside and outside the country, in any form, whether or not their principal activity, excluding those that are subject to the supervision of another regulator.  It required AML/CFT and CPF compliance standards and procedures, and the submission of STR/CTR to the FIU.
  • Secondly, the Prevention Agreement for Other Financially Obligated Subjects No. 001-2018 established the registration process for money remittance companies[91]. This applied to all natural or legal persons that provide money transfer services, either through transfer systems or transfer of funds, compensation of funds or by any other means, inside and outside of the country, whether or not its main activity.  It also imposed similar AML/CFT/CPF-based requirements on those affected.

IDENTIFIED AML/CFT DEFICIENCIES

Leaving aside proliferation (see below), and the obvious problem that tax crimes were not predicate crimes for money laundering purposes, a number of deficiencies were noted in the current International Narcotics Control Strategy Report (INCSR) from the US State Department –

  • Inconsistent, incomplete or unnecessary STR and CTR;
  • Compliance officers often include minimal analysis with STR;
  • Compliance officers are said to notify clients and/or bank executives and directors about investigations (or the likelihood of investigations) – with no “tipping off” law to criminalise such behaviour;
  • Authorities lack sufficient resources, including trained staff with industry experience (especially for DNFBP);
  • Regulators cannot access STR/CTR due to confidentiality laws;
  • The quality of analysis by the FIU was lacking, response times to foreign inquiries were too long, and the quality of requests from foreign counterparts was not good enough (the report suggested that FIU should become an independent agency);
  • The CFZ is vulnerable to illicit financial and trade activities due to weak customs enforcement and limited oversight of transactions;
  • Tax evasion is not a predicate crime (though legislation to make it such was under consideration in 2018); and
  • Law enforcement needs more and better tools to conduct long-term, complex financial investigations, including undercover operations.

 WHAT ABOUT PROLIFERATION? 

A good definition of proliferation was included in a paper from Project Alpha – “Proliferation is the spread of the capability to manufacture Weapons of Mass Destruction (WMD) to states intent on producing such weapons.  In each of the major WMD categories such as chemical weapons, biological weapons and nuclear weapons, there are international treaties which commit signature states to not seek such weapons and, in relation to nuclear and chemical weapons, there are verification regimes designed to detect whether states ‘cheat’.”.[92]

Since 2004, Panama had been party to the US-sponsored Proliferation Security Initiative[93], a move that would permit the US to search Panama’s flagships in international waters if they are suspected of transporting weapons of mass destruction or WMD equipment[94].  Under the agreement, Panama and the US would be able to ask each other for permission on short notice to board their respective flagships on the open seas.  The ship’s cargo could then be seized if it is found to be related to non-conventional weapons programmes.

The following is an extract from a paper by me dated 12th October 2018 and posted on my blog[95].

The export, transit or transhipment of strategic goods was not highlighted in the NRA as a significant threat.  However, it did note that the most vulnerable sectors for money laundering in Panama would be the sectors related to foreign trade, such as the free trade zones, especially the Colon Free Zone.  It said that there was no clear terrorism threat in Panama (at least to Panama itself, whereas an attack on the Canal could equally be a means of damaging the US, China or other major beneficiary from its services, or as merely a “spectacle” to gain publicity).  It was the financing of terrorism that was seen as a greater threat.

In May 2017, Panama enacted Executive Decree 81[96] for the control of trade and dual-use material for reasons of national and international security – in other words for the purposes of preventing proliferation of WMD and their delivery systems[97].  The Decree formed part of the Action Plan submitted to the UN by Panama in October 2017 outlining how it intended to implement UN SCR 1540, as amended[98].  As the Action Plan stated, UN SCR 1977 (2011) had invited member states to prepare on a voluntary basis a national implementation action plan for implementing UN SCR 1540 and to submit those plans to the UN’s 1540 Committee.

The aim of UN SCR 1540 is preventing chemical, biological, radioactive and nuclear (CBRN) weapons, as well as their means of delivery and related materials, from coming under the control of non-state actors[99], terrorist groups or organised crime and it urges member states to refrain from providing them with any form of support.  It also urges member states, in accordance with their national procedures, to adopt and enforce appropriate effective laws which prohibit any non-state actor to manufacture, acquire, possess, develop, transport, transfer or use chemical, biological, radioactive or nuclear weapons and their means of delivery, and related materials, for terrorist purposes or organised crime, as well as attempts to engage in any of the activities, participate in them as an accomplice, assist them or finance them.

Panama was already party to various relevant international treaties and agreements concerned with the control of CBRN weapons and materials – the Nuclear Non-Proliferation Treaty, the Biological and Toxic Weapons Convention, the Chemical Weapons Convention, and the Convention on the Physical Protection of Nuclear Materials.

Wisely, Panama chose to frame the new law so as to target both states and non-state actors.  It was required by the Decree to adopt a list of dual-use goods[100], and to make the transport, transfer, management, trade, import, export and re-export subject to control.  The Decree also called for the developing of a system to licence such goods, as well as outreach and educational efforts, and enforcement – all of which was to be outlined in an action plan required by the Decree.

Two bodies were created by the Decree: the National Council on Secure Trade (NCST) and the Technical Committee on Secure Trade and Transport (TCSTT) – see the table above for brief details of their roles.

The NCST and TCSTT were assisted in their work by existing bodies –

  • Container Technical Inspection Unit – which uses radiation portal monitors (RPM) at the main coastal ports. These devices are passive, non-intrusive devices used to screen objects and persons passing through them for nuclear and radiological materials[101];
  • Inter-Institutional Risk Analysis Office – for the analysis of information in cargo manifests to determine the risk profiles of cargo, vessels, and economic agents;
  • Joint Port Control Units (JCPU) – Panama is also a party to the Global Container Control Program[102], an initiative of the UN Office on Drugs and Crime and the WCO designed to improve container traffic security by providing training and promote co-operation among member nations. One of its elements is the creation of JCPU which specialise in the inter-agency profiling of port units at select container terminals in seaports or dry ports, and in Panama JPCU have been established at Balboa which covers the Port of Balboa; and in Colon which covers Port of Manzanillo, Colón Container Terminal and Port of Cristobal;
  • National Customs Authority (ANA – see the above table – ANA employs a “single window” system[103], the Sistema Integrado de Gestión Aduanera (SIGA) and, since 2017, the Panamanian Marine Authority and the Panama Canal Authority implemented Ventanilla Única Marítima de Panamá (VUMPA), an electronic system that requires ships to produce required documentation in advance of their arrival so that government agencies can conduct risk assessment and be ready for inspection by a single official.  A 2016 report found that SIGA could be adapted to be used to provide a strategic goods licensing system; and
  • Panama Canal Authority (PCA)[104] – which can deny a vessel transit of the Canal if the condition or character of the cargo “is such as to endanger Canal structures”, which must be taken to include potentially dangerous cargo, or “which might render the vessel liable to obstruct the waterway”, which again might include a dangerous cargo sinking or rendering the ship uncontrollable. The Regulation on Navigation in Panama Canal Waters requires a minimum of 96-hour notice of intent to transit with dangerous cargo (and similarly, cargo comprising hazardous waste is also required to be notified to the PCA.  It also requires all vessels transporting radioactive materials through the Canal to comply with applicable requirements[105], as published in the current edition of the IMDG Code[106] and there are specific requirements for certain types of radioactive cargo[107] with, for example, 30 days’ notice of fissile material carried as cargo – for other vessels intending to arrive at Panama Canal waters all cargo carried on board must be declared at least 96 hours prior to their arrival.

The Decree of 2017 also required a National Registration, Tracking, and Inventory System for Economic Agents of Dual-Use Goods.  This will entail a national register, and any “economic agent” wishing to participate in “handling”[108] dual-use goods will have to be registered.  It will be an electronic platform, managed by TCCST.  TCCST will also develop risk profiles of applicants for inclusion on the register.

At the time the Decree came into force the evidence appeared to show that Panama did not have a significant number of companies that imported or exported dual-use items.  Nevertheless, outreach and training would be needed to ensure that both officials and business was aware of the new controls, the requirement for registration when appropriate, and, in particular, the application of the controls to intangible technologies.

Panama is receiving assistance from the US Government under the Export Border and Related Security (EXBS) programme[109], with a focus on legal, licensing, and enforcement training, along with providing information systems and equipment.  There is also training and assistance provided under the Global Container Control Program[110].

Rather than compile its own list of items that should be subject to control, it was proposed that Panama should simply adopt the dual-use control list in use in the EU.  This had the advantages of complying with all the relevant international non-proliferation agreements, such as –

  • the Wassenaar Arrangement[111] on transfers of conventional arms and dual-use goods and The selection criteria for dual-use items under the Wassenaar Arrangement is that dual-use goods and technologies to be controlled are those which are major or key elements for the indigenous development, production, use or enhancement of military capabilities;
  • the Australia Group[112], the aim of which is the harmonisation of export controls, to ensure that exports do not contribute to the development of chemical or biological weapons;
  • the Nuclear Suppliers Group[113], a group of nuclear supplier countries that seeks to contribute to the non-proliferation of nuclear weapons through the implementation of two sets of Guidelines for nuclear exports and nuclear-related exports; and.
  • the Missile Technology Control Regime[114], a voluntary partnership of 35 countries to prevent the proliferation of missile and unmanned aerial vehicle (UAV or “drone”) technology capable of carrying above 500 kg payload for more than 300 km.

It is also regularly updated, and benefits from the input of all the Member States, several of which are themselves major producers of military and dual-use goods and technology.

Another useful factor is that the EU correlates the codes allocated to the dual-use items to their classification codes (“CN Codes” or commodity codes), 8-digit codes used to identify the items for customs purposes on declarations and other documentation[115].  These classification codes themselves correlate to the codes used worldwide under the Harmonized System (“HS Codes”)[116].

The 6-digit HS Code directly equates to the first 6 digits of the CN Code, allowing the items in question to be identified.  The first 2 digits identify the chapter the goods come under (e.g. Chapter 09 – Coffee, Tea, Maté and Spices).  The next 2 digits identify groupings within that chapter (e.g. 09.02 – Tea, whether or not flavoured).  The final 2 digits are even more specific (e.g. 09.02.10 – Green tea: not fermented).  Up to the 6-digit level, all countries classify products in the same way (a few exceptions exist where some countries apply old versions).

A decision was made in early 2018 for Panama to adopt the EU list.

Note that the EU uses the term “dual-use item” and not “dual-use goods”.  This emphasises that the controls and the control list deals with not just physical goods, but also software and technology – and therefore can cover intangible “exports” (such as the sending of designs or data) as well as the physical export of goods themselves.

Furthermore, since 2011 the EU Regulation prohibited exports of dual-use goods to destinations subject to an arms embargo imposed by the EU, OSCE[117] or UN.

The EU currently has in development a “recast” of the Regulation[118] which contains the dual-use list.  This recast, amongst other things, introduces a new “human security” dimension to export controls, to prevent the abuse of certain cyber-surveillance technologies by regimes with a questionable human-rights record, and use OECD-based “due diligence” guidelines to ensure that their goods cannot fall into the wrong hands.  The proposals also formally introduce standardised operational internal control programmes (ICP) as part of the assessment in the granting and control of export authorisations and licences[119] (such ICP were previously required by only some EU Member States).

It can be expected that the risk profiling and risk assessments undertaken by the Panamanian authorities would also take into account the existence and worth of such ICP.

The EU Regulation also includes a ‘catch-all clause’ for items which could be used in connection with a WMD programme but may not be included in the list of controlled items[120], and controls on brokering dual-use items and their transit through the EU[121].  It is unclear if either of these aspects are dealt with in the Panamanian law.

Under the EU Regulation, dual-use items are goods and technology which have both a legitimate civil use, but have also a use, or potential use, for military purposes, or for use in connection with weapons of mass destruction.  Goods affected include all those which can be used for non-explosive uses (as those with explosive uses would be caught by the general controls on military and paramilitary and related goods), and those relevant to the development, production or use of nuclear weapons and other weapons of mass destruction.

RESIDENT AGENTS

All companies and foundations in Panama must have an authorised resident agent.  Law No. 2 of 2011, defines a Resident Agent as being “the lawyer or law firm that provides services as such and that must keep the records required by this law for legal persons constituted in accordance with the laws of the Republic of Panama and with which maintains a professional relationship in the present”.

The Law also regulates the KYC measures for clients of resident agents.  Resident agents are required to identify the client, obtain information about the purpose for which the legal entity is created[122], and provide the competent authorities with information, as required, to combat money laundering and the financing of terrorism and any other illegal activity.

However, the MER said that the CDD requirements for resident agents was not clear – though it was clear that the must report any suspicious transactions to the FIU (though the MER also described the number of STR submitted for such transactions were “very scarce”[123]).  In any case, the agent is not obliged to obtain information on a third party acting for a client, when that third party is a legal person that belongs to a professional body requiring professional and ethical standards – such as a law firm, bank, insurer, trustee company, accountants etc.  That third party need only supply information on the client for whom it is acting “according to the requirements and procedures established in the laws of the jurisdiction where he performs his operations”[124].

From 2015 until the time of the GAFILAT on-site visit in 2017, the Intendencia had conducted a total of 48 supervision proceedings at attorneys and law firms – of the 4,216 registered resident agents.  Even so, 15 sanctioning proceedings have been started, but no sanctions have been applied to any case up to the date of the GAFILAT visit.  Furthermore, no sanctions have been applied for breach in the registration obligation with the FIU, which applies to 88% of the resident agents.

THE LEGAL SYSTEM

Panama is a civil law jurisdiction with codified laws, derived from Spanish and Roman law, but heavily influenced by US law in certain areas – such as having the concept of habeus corpus, and, to some degree, judicial precedent.  In Panamanian courts, trial by jury is not available to settle commercial disputes.

The highest court is the Supreme Court[125], consisting of 9 judges, each appointed for 10-year terms by the President and approved by the National Assembly.  Below that are appellate courts, other specialist courts, and 2 circuit courts[126] in each province, plus municipal, courts, family courts etc.

The US State Department in 2012 had claimed that the criminal justice system remains at risk for corruption.  This view was echoed by a report published by Transparency International in 2014[127], which stated that the organisation’s Global Competitiveness Report 2013-14 stated that the independence of the judiciary in Panama was the weakest in Latin America and Caribbean, raking at position 118 out of 148 in the world ranking at the time.  The World Bank “Doing Business” project is also said to have described the judicial system in Panama as being “slow, inefficient and corrupt”.  Transparency International also commented on weak implementation of anti-corruption conventions.

THE LEGAL SYSTEM – THE ACCUSATORIAL CRIMINAL JUSTICE SYSTEM

In 2016, Panama completed a transition of its criminal law, begun in 2011, to a new legal system similar to that in the US and UK.  This was the “Accusatorial Criminal Justice System”, aka “the penal accusatory system”.  An adversarial system featuring oral trials, and changing from the typically European-style inquisitorial system, where the court (or investigating magistrate) is involved in investigating all or part of the case, to one featuring oral trials and where the judge is the impartial referee between the prosecution and defence.  The objective of the reform was said to be to achieve a better investigation, prosecution and adjudication of criminal cases in Panama[128].

The previous system did not allow for the adjudication of cases during the investigation phase. Following the implementation of the new system, up to June 2016, it was said that Panama’s judiciary had already dealt with a total of 1,887 cases during the first 2 phases of the changeover, resulting in 91% of adjudications being handed down before trial[129].

BRIBERY AND CORRUPTION

In the 2017 Transparency International Index Panama was placed at 96th position, with a score of 37, largely unchanged since 2012[130].

The latest edition of the World Bank Worldwide Governance Indicators (WGI)[131], which provides a ranking of 215 countries and territories based on 6 dimensions of governance, including political stability, government effectiveness, and control of corruption, gave Panama a rating of 36 (out of a possible 100).

The 2018 MER identified corruption as one of the main internal threats giving rise to money laundering risk.

The prominence of corruption as a risk may be highlighted by the case of former President Martinelli, who was president 2009-2014.

In 2015, Panama’s Supreme Court ordered Martinelli’s arrest over accusations that he used public funds to illegally spy on more than 150 prominent people.  He flew to the US just days before the court launched a corruption investigation against him, but was detained there and subsequently extradited back to Panama in 2018.  Returning home, he faced 8 charges – these including allegations that he rigged tenders for public contracts for meals and book bags for schoolchildren under Panama’s largest social welfare scheme, the National Aid Program. In June 2018, Transparency International Panama estimates that as much as 1% of Panama’s GDP – approximately $600 million – may have been lost to various corruption schemes during Martinelli’s presidency[132].

COLON FREE ZONE[133]

As early as 1914, a feasibility study suggested Colon as the best place for a free zone.  In 1948, Law No.18 established the Colon Free Zone (CFZ) as an autonomous institution of the Panamanian state, which would have its own legal personality, but subject to inspection and surveillance by the Presidency and the Comptroller General.

Hence, the CFZ now forms a customs territory located in Panama, but to and from which goods can be imported and exported free from tariff, fees, customs rights and sales taxes.  It is located in the province of Colon at the Atlantic end of the Panama Canal.  It attracts services and bases for importing, storing, assembling, packing and re-exporting goods from all over the world, especially electronic devices, pharmaceutical products, liquors, tobacco, home and office furniture, textile products, footwear, jewellery and toys.  CFZ in 2015 accounted for 6% of all non-finance jobs in the country.[134]

It is now the largest free port in the Americas, and second largest in the world, occupying about 2.4 km2 (600 acres) and divided into 2 large areas: one segregated from the city of Colon by a wall, and the other in the harbour area, which is designated for warehouses, covering 0.53 km2 (130 acres) and not far from Colón’s commercial sector.  There are said to be over 3000 companies either represented or operating from the zone.

It also has a special tax regime that offers the exemption of several kinds of taxes, with the purpose of promoting the establishment of companies in the zone[135].

The CFZ has a web-based electronic documentation system which allows agents of users of the zone to present documentation to the CFZ administration and customs offices remotely[136].

In 2010, FATF published a report[137] claiming that free trade zones (FTZ), which include free ports, were a ‘money-laundering and terrorist-financing threat’ partly due to inadequate safeguards, relaxed oversight and weak inspections.  It sought to demonstrate, using a series of cases studies, ways in which such zones could be misused for money laundering and terrorist financing purposes.  The chief factors which this report identified as making the zones vulnerable were –

  • inadequate AML/CFT safeguards;
  • relaxed oversight by competent domestic authorities;
  • weak procedures to inspect goods and register legal entities, including inadequate record-keeping and information technology systems; and
  • lack of adequate co-ordination and co-operation between zone and customs authorities.

“The Global Illicit Trade Environment Index Free trade zones: Five case studies”[138] was produced by the Economist Intelligence Unit (EIU) and published in 2018.  One of the 5 case studies it featured dealt with the CFZ.  Saying that the CFZ is large and hugely important, the report notes that in 2017 the total trade passing through it totalled $19.7 billion[139].  The report remarks that Panama scored zero on the FTZ governance indicator, with the CFZ singled out for lacking effective controls and thus having little in the way of enforcement.

The EIU report claimed that cigarette smuggling is rife, particularly of illicit “white cigarettes”[140], said to chiefly originate in China, India, UAE and Paraguay, and then being sent on to destinations elsewhere in Latin America, including to other free zones.  It is also said that the chief purpose of the cigarette smuggling is “origin laundering”, i.e. disguising or misdescribing the origin of the goods to benefit from preferential tax or duty treatment, or to avoid discrimination (e.g. to enable the product to be portrayed of domestic production).

In October 2018, the European Parliament Research Service (EPRS) produced a study into money laundering and tax evasion risks in free ports at the request of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3).[141]  This had followed concerned expressed about free zones expressed in resolutions in the Parliament.  Included in this report were useful explanations of what free zones and free ports were.

The EPRS report used the following description of “free ports” –

Free ports are warehouses in free zones, which were – originally – intended as spaces to store merchandise in transit. They have since become popular for the storage of substitute assets, including art, precious stones, antique, gold and wine collections – often on a permanent basis. Apart from secure storage, sales arguments in the free port business include the deferral of import duties and indirect taxes such as VAT or user tax as well as a high degree of secrecy.

“Free zones”, however, were said by the EPRS report to fall into 4 broad categories –

  • Free trade zones, typically located near seaports or airports, mainly offer exemptions from national import and export duties on goods that are re-exported. Local services gain, though there is little, if any, value added to the goods traded.
  • Export processing zones go a step further by focusing on exports with a significant value added, rather than only on re-exports.
  • Special economic zones apply a multisector development approach and focus on both domestic and foreign markets. They offer an array of incentives including infrastructure, tax and custom exemptions, and simpler administrative procedures.
  • Industrial zones are targeted at specific economic activities, say media or textiles, with infrastructure adapted accordingly.

Although the CFZ has not been linked to the storage of art, as an illustrating of how free ports and free zones can adapt and evolves, the EPRS study looked in depth at Le Freeport in Luxembourg, where art is involved, the study noting that as interest in art as an investment has grown[142], the appeal of storing it tax-free while it potentially appreciates in value has grown too, spurring the expansion of free ports in Geneva and similar facilities elsewhere in Europe and Asia.  Owners do not have to pay import or export taxes when they ship to or from those locations.

The CFZ is not the only free zone in Panama, it having granted a total of 16 licences to operate zones, between the cities of Panama and Colon.  The Panama Pacifico Area[143] is one of the most important projects and the main objective of this Special Economic Area[144] is the attraction of new direct foreign investment and the creation of jobs in Panama.

There are also container and logistic parks, with Panama regarded as an excellent logistics centre due to its position and connections – internal and external.  An example is Panama Logistics Park[145], a real estate industrial project and logistics centre of 460,000m2, strategically located in the east of Panama City and a short distance from Tocumen Airport.

THE PANAMA PAPERS

The Panama Papers is the name for the release of documents obtained from a Panama-based offshore services provider called Mossack Fonseca[146], and for the investigations carried out following this[147].

The International Consortium of Investigative Journalists (ICIJ), together with the German newspaper Suddeutsche Zeitung and more than 100 other media partners, spent a year sifting through 11.5 million leaked files that originated with Panama-based Mossack Fonseca.  2 years later, Suddeutsche Zeitung received further leaked documents from the now-defunct law firm[148] comprising some 1.2 million additional documents, mostly covering the years 2016-2017.

Operating in more than 21 jurisdictions, Mossack Fonseca was considered one of the 5 biggest wholesalers of offshore secrecy in the world.   Of the companies that appear in Mossack Fonseca’s files, around 50% of the more than 113,000 were incorporated in the BVI; but the second favourite jurisdiction was Panama itself, where the firm had its headquarters.   Mossack Fonseca traces its beginnings to 1986, when Ramón Fonseca merged his small, law firm in Panama with another local firm headed by Jürgen Mossack, a Panamanian of German origin[149].

The investigation noted that when the BVI cracked down on bearer shares in 2005, Mossack Fonseca moved bearer share clients to Panama.

In February 2017, police in Panama arrested the founders of Mossack Fonseca on money laundering charges after authorities raided the firm’s headquarters as part of investigations into Operation Car Wash[150], Brazil’s largest-ever bribery scandal[151] and Brazilian construction company, Odebrecht[152].  Panama’s Attorney General Porcell called Mossack Fonseca “a criminal organisation that is dedicated to hiding money assets from suspicious origins”. Mossack and Fonseca were released in April 2017.

Panama’s attorney general’s office told Süddeutsche Zeitung that five criminal investigations related to Mossack Fonseca are ongoing.

In the wake of the leaks the firm sought to help (and hopefully retain) some clients by changing its own business name to remove any obvious reference to the Panamanian founders on mail, packages, and invoices.  In Samoa, Mossack Fonseca became Central Corporate Services Ltd.  In Panama, Mossack Fonseca transferred clients to Orbis Legal Services, which hired some Mossack Fonseca employees to maintain the “same level of service”.[153]

In May 2016, the firm announced to clients that it was shutting down its office in the Isle of Man, and closures of its offices in Jersey and Hong Kong soon followed.  Later that year, Fonseca and Mossack announced that they would retire from the firm they had founded.  A skeletal Mossack Fonseca would remain open for a few years longer to fulfil existing obligations but would “eventually wither away,” an email to clients said.

In 2018 the firm bearing closed for good.  However, in May 2018, prosecutors in Panama charged 10 Mossack Fonseca employees with money laundering as part of investigations into the Car Wash scandal.  Mossack remained under investigation elsewhere, including in Germany as an accessory to tax evasion[154].

ILLEGAL UNREPORTED UNREGULATED (IUU) FISHING

From November 2012, the European Commission undertook what it described as a formal dialogue with several countries which were warned of the need to take strong action to fight IUU fishing.   One of these countries was Panama[155].  When significant progress was observed, the Commission could end the “dialogue” (using a football metaphor, cancelling the yellow warning card).  This was the case for Panama in October 2014.

A 2014 study estimated that almost 40% of the total fishing catch of Panama in the years 1950 to 2010 was not accounted for[156].  Whilst there could be other reasons for the shortfall, illegal fishing by foreign vessels and the bycatch by legal vessels were two of the reasons suggested.

With its large shipping register it was perhaps inevitable that Panama should be one of the countries affected.

The EU IUU Regulation entered into force in 2010 and applied to all landings and transhipments of EU and third-country fishing vessels in EU ports, and all trade of marine fishery products to and from the EU. It aims to make sure that no illegally caught fisheries products end up on the EU market.  To achieve this, the Regulation requires countries to certify the origin and legality of the fish caught by vessels flying their flag, thereby ensuring the full traceability of all marine fishery products traded from and into the EU. The system thus ensures that countries comply with their own conservation and management rules as well as with internationally agreed rules.  In addition to the certification scheme, the Regulation introduces an EU alert system to share information between custom authorities about suspected cases of illegal practices[157].

In November 2018, it was announced[158] that Panama was to make the location of fishing vessels in its waters publicly available via the open-access Global Fishing Watch[159], which tracks the location and activity of commercial fishing vessels using tracking signals from a vessel’s AIS or VMS systems[160].  Panama had already been one of 4 countries from Latin America that had signed an MoU with Global Fishing Watch and the environmental foundation PACIFICO[161] to develop a joint strategy to improve transparency in fisheries management at the regional level.

KIMBERLEY PROCESS AND “BLOOD” OR “CONFLICT” DIAMONDS

The Kimberley Process Certification Scheme (KPCS) is a set of standards that regulates the trade in rough diamonds (ala conflict diamonds)[162].  It sets out the way in which each participating country should handle the imports and exports of rough diamonds, and internal controls for ensuring that domestic trading and processing are not contaminated by illicit sales.

It dates from May 2000 when governments, NGO and industry groups sought to come up with a practical way to prevent illicit diamonds from entering the legitimate diamond trade.   The resulting Kimberley Process Certification Scheme was designed and entered into force in 2003, with the support of the UN and WTO.

Panama joined the Kimberley Process in 2012[163].

The Panama Diamond Exchange (PDE) – renamed the World Jewelry & Diamond Hub, Panama in 2016, as a large number of its members also dealt in jewellery -was the first and only diamond bourse in the entire region of Latin America, including South America, Central America, Mexico and the Caribbean.  It was established in 2006 and officially accepted into the World Federation of Diamond Bourses (WFDB) in 2008.

An article published in 2008 by the Center for Security Studies (CSS) at ETH Zurich[164] warned that Panama might become a funnel for smuggling illegal diamonds abroad; saying that observers worried that Panama’s role in laundering illegal diamonds mined in South America might only grow as the Central American country became a regional hub of the Latin American diamond trade.  In the article, Venezuelan and Guyana diamonds were singled out as those might likely to be laundered through Panama.  In 2008, there were reports of Venezuelan diamonds being smuggled through Panama[165].

It would appear that Intendencia has responsibility for AML/CFT supervision of traders in the diamond business.

INDIRECT TAX

Panama has a form of VAT, called ITBMS (impuesto a las transferencias de bienes corporales muebles y la prestacion de servicios), and applies to imported goods, products sold or services rendered in Panama[166].  Exports of goods, and certain export-related services (such as international freight charges), are ITBMS-exempt.

According to the OECD in 2018, Panama raises about 2.6% through ITBMS receipts, but only collects around 62% of potential revenue, meaning that 38% is lost[167].

There is also a stamp tax levied on the issuance of certain documents.

ISC is a selective consumption tax (impuesto selectivo al consumo), an excise tax on imports of specific goods such as luxury vehicles, jewellery, firearms, alcoholic beverages and tobacco products.

Insurance tax is levied on insurance premiums.

HUMAN TRAFFICKING

Panama has been described[168] as a source, transit, and destination country for men and women exploited in sex trafficking and forced labour. Children are exploited in forced labour, particularly domestic servitude, and sex trafficking in Panama.  Most identified trafficking victims are foreign adults exploited in sex trafficking, especially women from South and Central America[169].  However, it is also said that Panamanians are also exploited in the country, and elsewhere in the Caribbean and Latin America.

In 2018, it was reported[170] that, following a 2-year investigation, Costa Rica and Panama had combined to dismantle a criminal organisation smuggling Chinese to central America for labour exploitation or for onward transportation to the US[171].  It was alleged that Chinese nationals with links to Asia, Europe and South America had been involved.  The smuggled individuals were brought from China to Europe by air, moving on to Ecuador, Peru, or Colombia, but with Costa Rica as their final destination – mostly entering through Juan Santamaría International Airport in San José (with the alleged connivance of officials there).  The fee charged was said to be between $22,000 and $45,000 fee.  Some were smuggled to Panama[172] for onward trafficking to the US.  In most cases, it was said, those involved became indebted to the criminals, a debt they then had to pay off and/or work for the criminals.

This was not an isolated case, insofar as the trafficking or people into Latin America is concerned.  Earlier in 2018, for example, another gang was found to have charged victims about $10,000 each to bring Asian (including Chinese) people from the Ecuador/Colombia border to Panama for onward passage into the US.

The US State Department 2018 Trafficking in Persons Report[173] said that the Government of Panama does not fully meet the minimum standards for the elimination of trafficking[174]; however, it is making significant efforts to do so[175].  It was said to have demonstrated increasing efforts by investigating, prosecuting, and convicting more traffickers; establishing the National Commission on the Identification and Protection of Victims to address victim identification and administer victim services; and developing and implementing its 2017 National Plan Against Human Trafficking[176] (PNTdP; a 5-year plan extending to 2022)[177].  There is a National Commission for Countering the Trafficking of Persons (Comisión Nacional contra la Trata de Personas)[178], chaired by the Ministry of Public Security.  However, it said, the government did not meet the minimum standards in several key areas. 

Article 456 of the penal code does not criminalise all forms of sex and labour trafficking because it required movement to constitute a trafficking offence[179].  Anyone who promotes, leads, organises, finances, invites, or manages by any means of communication, mass or individual, or in any other way facilitates the entry into or the exit from Panama or the movement within Panama of a person of any sex, to realise one or several acts of prostitution or to submit a person to exploitation, sexual or labour servitude, slavery or activities similar to slavery, forced labour, servile marriage, mendacity, illicit extraction of organs or irregular (illegal) adoption[180], is guilty of an offence.  The use of force, fraud, or coercion are aggravating factors, rather than essential elements of the crime.

Within Panama itself, it has been reported that victims include Nicaraguan men[181], and to a lesser degree, Colombians, for use in the areas of construction, agriculture, mining and other sectors. Most victims of labour trafficking come from Nicaragua by bus and enter Panama through Costa Rica[182].

 

 

Ray Todd

12th November 2018

Updated 21st November 2018

GLOSSARY

 

ACP Panama Canal Authority (Autoridad del Canal de Panama)
AEOI Automatic Exchange of Financial Account Information
ALP Arm’s length principle (for transfer pricing)
AMERIPOL Comunidad de Policías de América
AML Anti-money laundering
AML/CFT Anti-money laundering/countering financing of terrorism
ANA National Customs Authority (Autoridad Nacional de Aduanas)
BEPS Base erosion and profit-shifting, see: http://www.oecd.org/tax/beps/
CBRN Chemical, biological, radiological and nuclear weapons
CDD Customer Due Diligence
CFP Countering the financing of poliferation
CFZ Colon Free Zone
CICAD/OEA Inter-American Commission for the Control of Drug Abuse, of the Organization of American States
CNBC National Council against ML/FT/FPWMD (Consejo Nacional Contra el Blanqueo de Capitales, Financiamiento del Terrorismo, y de la Proliferación de Armas de Destrucción Masiva)
CN Code Combined Nomenclature of the EU
CNS National Security Council
COMALEP Multilateral Customs Agreement for Latin America, Spain and Portugal
CRS OECD Common Reporting Standard
CSN National Security Council (Consejo de Seguridad Nacional)
CSS Center for Security Studies
CTR Cash Transaction Report
DGI General Directorate of Revenue (Dirección General de Ingresos)
DIJ Judicial Investigation Directorate (Dirección de Investigación Judicial)
DNFBP Designated Non-Financial Businesses and Professionals
EIU Economist Intelligence Unit
EPRS European Parliament Research Service
EU European Union
EXBS US Government Export Border and Related Security programme
FATF OECD Financial Action Task Force
FIU Financial Intelligence Unit
FSRB FATF-style regional body (see GAFILAT)
FTZ Free trade zone
GAFILAT Financial Action Task Force of Latin America (the FATF-style regional body)
GIA Inter-institutional Anticorruption Group (Grupo Interinstitucional Anticorrupción)
HS Code WCO Harmonised System Code to classify traded goods
ICP Internal control programme
ICIJ International Consortium of Investigative Journalists
ICRG FATF International Cooperation Review Group
IMDG Code International Maritime Dangerous Goods Code of the International Maritime Organisation
INCSR US State Department International Narcotics Control Strategy Report
Intendencia Supervisor and regulator of non-financial reporting institutions and activities (Intendencia de Supervisión y Regulación de Sujetos Obligados No Financieros)
INTERPOL International Criminal Police Organization
IPACOOP Panamanian Autonomous Cooperative Inssitute (Instituto Panameño Autónomo Cooperativo)
ISC Selective consumption tax (impuesto selectivo al consumo)
ITBMS impuesto a las transferencias de bienes corporales muebles y la prestacion de servicios – a form of value added tax
IUU Illegal Unreported unregulated fishing
JPCU Joint Port Control Units
JCJ Gambling Control Board (Junta de Control de Juegos)
KPCS Kimberley Process Certification Scheme
KYC Know your customer
MEF Ministry of Economy and Finance (Ministerio de Economía y Finanzas)
MER Mutual evaluation report
MICI Ministry of Trade and Industry (Ministerio de Comercio e Indus-tria)
MINGOB Ministry of Government (Ministerio de Gobierno)
MIRE Ministry of Foreign Affairs (Ministerio de Relaciones Exteriores)
ML/TF Money laundering/terrorist financing
MoU Memorandum of Understanding
MSB Money services businesses
MUSBER Unified Risk-based supervisión handbook (Manual Único de Su-pervisión Basado en Riesgo)
NCST National Council on Secure Trade
NPO Non-profit organisation
NFRI Non-financial reporting institutions
NGO Non-governmental organisation
NRA National Risk Assessment
OECD Organisation for Economic Development and Co-operation
PANDEPORTES Panamanian Sports Institute
PCA Panama Canal Authority (Autoridad del Canal de Panama)
PDE Panama Diamond Exchange (now the World Jewelry and Diamond Hub)
PEP Politically Exposed Person
PGN Office of the Attorney General of the Nation (Procuraduría General de la Nación)
PNTdP National Plan Against Human Trafficking
PPO Public Prosecutor’s Office
PWMD Proliferation of Weapons of Mass Destruction
RI Reporting Institutions
RPM Radiation portal monitors
RRAG GAFILAT Aset Recovery Network (Red de Recuperación de Activos de GAFILAT)
S.A. Corporation (Sociedad Anónima)
SBP Bank supervisor of Panama (Superintendencia de Banco de Panamá)
SENAFRONT National Border Control Service (Servicio Nacional de Frontera)
SEZ Special Economic Zone
SIGA Customs single-window declaration system (Sistema Integrado de Gestión Aduanera)
SMV Supervisor of the Securities Market (Superintendencia del Mercado de Valores)
SSRP Panama Supervisor of Insurance and Reinsurance (Superintenden-cia de Seguros y Reaseguros de Panamá)
STR Suspicious Transaction Report
TAX3 EU Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance
TCSTT Technical Committee on Secure Trade and Transport
TEU Twenty-feet equivalent unit – an inexact unit of cargo capacity often used to describe the capacity of container ships and container terminals
TF Terrorist Financing
UAV Unmanned air vehicle (aka drone or remotely piloted vehicle, RPV)
UAE United Arab Emirates
UAF See FIU (Unidad de Análsis Financiero)
UN United Nations
UNODC United Nations Office on Drugs and Crime
UN SCR United Nations Security Council Resolution
WCO World Customs Organisation
WGI World Bank Worldwide Governance Indicators
WMD Weapons of mass destruction
WTO World Trade Organisation
ZLC Colon Free Zone

 

AMENDMENTS TO THIS PAPER

 16 November 2018            

Added section on “Human Trafficking”.

Reference to new container terminal at Corozal added in footnote on page 1.

21 November 2018

Section on IUU fishing updated with reference to GPW and 2014 survey into Panamanian fishing.

 

[1]  In the 2018 fiscal year the Canal enjoyed a record tonnage passing through, 9.5% up on the previous year, at 442.1 million “Panama Canal tons” or PC/UMS: https://www.hellenicshippingnews.com/panama-canal-registers-record-year/ .The Panama Canal/Universal Measurement System is based on net tonnage, modified for Panama Canal purposes and uses a mathematical formula to calculate a vessel’s total volume; with 1 PC/UMS net ton being equivalent to 100 cubic feet of capacity.

[2]  In 2018 it was announced that the Panama Canal Authority (ACP) is planning to relaunch the concession process to build and operate a new container terminal at Corozal on the Pacific side of the canal in 2020.

[3]  In 2016, 6.2 million TEU containers touched Panamanian ports.  80% of the TEU containers were in transit with final destinations to other countries of the Americas: https://www.inta.org/INTABulletin/Pages/Anticounterfeiting_Update_7214.aspx

[4]  For an overview of the role of Panama as a transit and logistics centres see the Panama Logistics Web Portal: https://logistics.gatech.pa/en/

[5]  The Canal is said to contribute around4% of the country’s GDP: http://www.oecd.org/countries/panama/

[6]  For a very recent feature on the Canal see: https://theloadstar.co.uk/wp-content/uploads/panamalr.pdf

[7]  Panama does not have a central bank.  It uses the US Dollar as its de facto currency and has a completely market-driven money supply.  This means that Panama cannot produce money; it must instead buy or obtain its dollars by producing or exporting real goods or services.  The currency in Panama is known as the Balboa, even though US banknotes are used.  One Balboa is divided into 100 centésimos, and is issued in 1 cent, 10 cents, 25 cents, and 50 cents coins.  Balboas are only issued as coins; Panama does not issue its own banknotes, and acquired US banknotes are used instead.  The use of the US currency as its own makes it both easier and more likely that the country can be used to launder cash, and that therefore bulk cash smuggling from the US (and elsewhere in the region where US currency is used or accepted) is a real threat.

[8]  In 2016, 13% of the 6.2 million TEU containers entering Panama were destined for the CFZ: https://www.inta.org/INTABulletin/Pages/Anticounterfeiting_Update_7214.aspx

[9]  US State Department International Narcotics Control Strategy Report 2018: https://www.state.gov/documents/organization/278760.pdf

[10]  https://www.treasury.gov/press-center/press-releases/Pages/jl0450.aspx

[11]  https://www.reuters.com/article/us-panama-odebrecht/odebrecht-agrees-to-pay-220-million-fine-aid-panama-probe-idUSKBN1AH57C

[12]  https://www.britannica.com/biography/Ricardo-Martinelli

[13]  http://www.imf.org/external/pubs/cat/longres.aspx?sk=43208.0

[14]  The National Risk Assessment of Money Laundering and Financing of Terrorism – see later in the paper,

[15]  Not helped by tax crimes not being predicate crimes for money laundering under Panamanian law, although in 2018 moves were underway to change this situation.

[16]  Panama was a province of Colombia until US pressure in the early 20th Century saw it gain independence in 1903 (and so enable the construction of the Canal), and some Colombians still regard Panama as its “lost” province.

[17]  https://www.export.gov/article?id=Panama-foreign-trade-zones

[18]  A 2010 report from FATF had already documented the vulnerabilities of free zones to money laundering: http://www.fatf-gafi.org/media/fatf/documents/reports/ML%20vulnerabilities%20of%20Free%20Trade%20Zones.pdf

[19]  https://www.panamatoday.com/economy/free-trade-zones-panamas-weakest-flank-money-laundering-3504

[20]  https://www.state.gov/documents/organization/278760.pdf

[21]  El Grupo de Acción Financiera de Latinoamérica; an inter-governmental organisation that comprises 16 countries from South America, Central America and North America: http://gafilat.org.iplan-unix-03.toservers.com/content/inicio/

[22]  http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html

[23]  https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/

[24]  https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2018.029.01.0002.01.ENG&toc=OJ:C:2018:029:TOC

[25]  For a background briefing note on the blacklist see http://www.europarl.europa.eu/cmsdata/147404/7%20-%2001%20EPRS-Briefing-621872-Listing-tax-havens-by-the-EU-FINAL.PDF

[26]  As defined by the OECD, base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.  For more information see: http://www.oecd.org/tax/beps/

[27]  For example, in September 2016, the Panamanian Assembly adopted draft Law No.363, an agreement between Panama and the US to improve international tax compliance through co-operation on the Foreign Accounts Tax Compliance Act (FATCA).

[28]  http://www.oecd.org/tax/automatic-exchange/common-reporting-standard/

[29]  http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/crs-by-jurisdiction/crs-by-jurisdiction-2018.htm

[30]  Ibid.

[31]  http://oecdobserver.org/news/archivestory.php/aid/670/Transfer_pricing:_Keeping_it_at_arms_length.html

[32]  http://www.oecd.org/tax/beps/

[33]  http://www.oecd.org/tax/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-account-information-in-tax-matters-second-edition-9789264267992-en.htm

[34]  The CRS Multilateral Competent Authority Agreement (CRS MCAA).

[35]  http://www.oecd.org/ctp/panama-joins-international-tax-co-operation-efforts-to-end-bank-secrecy.htm

[36] http://www.oecd.org/countries/panama/

[37]  http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html

[38]  http://www.fatf-gafi.org/media/fatf/documents/methodology/FATF%20Methodology%2022%20Feb%202013.pdf

[39]  http://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/MER-GAFILAT-Panama-Jan-2018.pdf

[40]  This was nevertheless an improvement over the previous MER on 2014, in which it was reported that Panama fully complied with only 1 Recommendation; mostly complied with 3 Recommendations; partially complied with 26 Recommendations; and did not comply with 19 Recommendations.  It did not receive a compliant or largely compliant rating in any of the 16 Principal and Fundamental Recommendations: https://www.imf.org/external/pubs/ft/scr/2014/cr1454.pdf

[41]  This conclusion being underlined by the Odebrecht affair (see above)

[42]  However, in 2016, of 6.2 million TEU containers entering/leaving the country, only 56 were seized for containing counterfeit goods (and this was down from 233 the previous year), with 61% of the goods said to be in transit (i.e. not destined for the Panamanian domestic market).  INTA, the International Trademark Association, identified the CFZ as “a sensitive hub of counterfeit goods”: https://www.inta.org/INTABulletin/Pages/Anticounterfeiting_Update_7214.aspx

[43]  Involved in trade-based money laundering and other trade-based financial crime: https://www.gov.im/media/1348726/notice-1000-man-trade-based-money-laundering-july-18.pdf

[44]  Which might include proliferation, sanctions-busting etc.  In 2018, Panama adopted new export controls for dual-use goods, and also adopted the EU list of dual-use items (see below).

[45]  Ibid.

[46]  See MER paragraph TC31.

[47]  http://www.fatf-gafi.org/media/fatf/content/images/National_ML_TF_Risk_Assessment.pdf

[48]  “Assessing risks and applying a risk-based approach”.

[49]  Evaluación nacional de riesgos de blanqueo de capitales y financiamiento al terrorismo de Panamá: http://www.mef.gob.pa/es/Documents/Evaluacionde%20RiesgoPanama.pdf

[50]  Established under Law 23 of 2015.

[51]  https://www.presidencia.gob.pa/en/Security/Panama-has-taken-measures-to-combat-money-laundering-Minister-Aleman

[52]  Or, indeed, tax evasion/avoidance, as apparently evidenced by the “Panama Papers” and the Odebrecht affair.

[53]  Which may seem odd, given its neighbour is Colombia, which has endured decades of problems with criminal and paramilitary organisations (the two elements are almost inevitably linked), and even now, despite a ceasefire between the government the main paramilitary groups (such as FARC) – which appears under risk, to say the least, after recent elections in Colombia – continues to suffer from severe problems from crime and drugs/paramilitary gangs.

[54]  Designated non-financial business or profession – best described as a “FATF catch-all for any business or profession that poses a money laundering risk but cannot be classified as a financial institution”: http://www.joebm.com/papers/173-W00047.pdf being those businesses and professions that have similar potential to financial institutions to be used for money laundering.  They can include auditors, accountants, tax advisors, casinos and other gambling service providers, CSP, dealers in precious metals or precious stones, lawyers, notaries and other independent legal professionals, real estate agents and trusts.

[55]  On the other hand, the National Strategy labelled the sector’s vulnerabilities as being low (despite the apparent evidence of such as the Panama Papers).

[56]  Law No. 2 of 2011, defines a Resident Agent as being “the lawyer or law firm that provides services as such and that must keep the records required by this law for legal persons constituted in accordance with the laws of the Republic of Panama and with which maintains a professional relationship in the present”.

[57]  Article 3 of Law 2 of 2011 refers.

[58]  See MER page 105.

[59]  See MER page 104 (paragraph 472).

[60]  See MER paragraph TC26.

[61]  See MER paragraph TC112.

[62]  https://www.superbancos.gob.pa/en/prev-cont-il-op/national-strategy

[63]  At least at the the time of the GILFAT on-site visit in 2017.

[64]  http://www.uaf.gob.pa/

[65] Created under Executive Decree 136 (1995): Unidad de Análsis Financiero (UAF) in Spanish.

[66]  At the time of the 2018 MER, some DNFBP did not have access to the platform.

[67]  The STR rejection system allows feedback, both immediate and periodic, that is said to have improved the quality of STR.

[68]  See comments re the “Panama Papers” below.

[69]  https://egmontgroup.org/

[70]  The MER records that at the time of on-site visit there 84 such MoU, including with members of Egmont.

[71]  MER paragraph 513.

[72]  http://www.uaf.gob.pa/Preguntas-Frecuentes

[73]  Created by Resolution No. 25 of 2016 by the Office of the Attorney General.

[74]  “Bearer negotiable instruments”, or BNI, in the terminology of FATF.

[75]  Law No. 30 of 1984, as amended by Law No. 49 of 2009.  The laws allow for the seizure of all goods affected by smuggling or customs fraud, including the cash etc.

[76]http://www.mef.gob.pa/es/direcciones/CNBC/Paginas/Estructura%20y%20Funciones.aspx?selectedClass=menuItem-1

[77]  http://www.mef.gob.pa/es/direcciones/CNBC/Paginas/Conformacion.aspx?selectedClass=menuItem-3

[78]  Comisión de Economía y Finanzas de la Asamblea Nacional.

[79]  Executive Decree No. 290 of 2016 created GIA.

[80]  Created by Law No. 19 of 2010.

[81]  Note that NPO are not (at the time of the GAFILAT on-site visit) covered by the 2015 AML law, though they are required to be registered with one of several government ministries, or the Panamanian Sports Institute (PANDEPORTES) – which regulates and grants legal status to NPO related to sports activities.  They also have to submit an annual donation report to the General Revenue Office for taxation purposes.

[82]  However, in the National Strategy there is an action plan so that the licensing of these reporting institutions can be in charge of the Superintendence of Banks

[83]  There is gold, and a large-scale, multibillion-dollar copper mining project 120 km from Panama City (said to be capable of producing 380,000 tonnes of copper a year).

[84]  Established by Decree No. 2 of 1998.

[85]  With the Ministry of Commerce and Industry being the lead ministry.

[86]  Autoridad del Canal de Panamá (or ACP) in Spanish: https://www.pancanal.com/eng/op/notices/2018/N01-2018.pdf

[87]  http://www.uaf.gob.pa/

[88]  Which created the National Coordination System for the Prevention of Money Laundering, TF and the Proliferation of Weapons of Mass Destruction of the Republic of Panama.

[89]  https://www.gacetaoficial.gob.pa/pdfTemp/28546_B/GacetaNo_28546b_20180613.pdf

[90]  https://www.dentonsmunoz.com/en/insights/articles/2018/october/29/register-of-exchange-houses-before-the-superintendency-of-banks

[91]  https://www.dentonsmunoz.com/en/insights/articles/2018/october/29/register-of-money-remittance-companies-with-the-superintendency-of-banks

[92] https://projectalpha.eu/wp-content/uploads/sites/21/2018/11/Big-Data-and-Non-proliferation-The-Alpha-Proliferation-Open-Source-Tool-Alpha-POSTas-posted.pdf

[93]  https://www.gpo.gov/fdsys/pkg/PPP-2004-book1/pdf/PPP-2004-book1-doc-pg860.pdf

[94]  https://www.nti.org/gsn/article/panama-joins-proliferation-security-initiative/

[95]  https://wordpress.com/post/raytodd.blog/4970

[96]  https://www.gacetaoficial.gob.pa/pdfTemp/28287_B/61296.pdf

[97]  For more information on Executive Decree 81 and its path to implementation, please see “Facilitating the Implementation of Strategic Trade Controls in the Republic of Panama” (Strategic Trade Review Journal, Spring/Summer 2018: https://strategictraderesearch.org/current-issue-summer-2018/

[98]  http://www.un.org/en/sc/1540/documents/Panama_action_plan.pdf : a summary of its content was included in my blog post of 12th October: https://wordpress.com/post/raytodd.blog/4970

[99]  An individual or organisation that has significant political or other influence but is not allied to any particular country or state.  In the context of UN SCR 1540 it is often used to mean terrorist and paramilitary organisations and their members, supporters and organisers.

[100]  Note that the EU Dual-use List adopted by Panama as its own uses the term “dual-use items”.

[101]  For some background on RPM, see this Stanford University article: http://large.stanford.edu/courses/2016/ph241/wolk1/

[102]  https://www.unodc.org/ropan/en/BorderControl/container-control/ccp.html

[103]  Such a system provides a single entry point (or “window”) – either physical or electronic – for the submission of all data and documents related to the declaration, clearance and release of goods, and managed by one agency, which then can inform any other agency required and apply or direct any necessary control action. See: http://tfig.unece.org/contents/single-window-for-trade.htm

[104] Autoridad del Canal de Panama, or ACP in Spanish:  https://www.pancanal.com/eng/index.html

[105]  As well as proof of financial responsibility and adequate provision for indemnity to third parties as a guarantee against any possible damage and/or loss.

[106]  The International Maritime Dangerous Goods Code of the International Maritime Organisation: see http://www.imdgsupport.com/free%20imdg%20code%20introduction%2037-14.pdf

[107]  See paragraph 16 of NOTICE TO SHIPPING No. N-1-2018: https://www.pancanal.com/eng/op/notices/2018/N01-2018.pdf

[108]  The Decree defines “handling” as meaning: “Any action that consolidates, deconsolidates, guards, preserves, packs, unpacks, repacks, handles, dispatches, transships, transits, transports, ensure, measure, certifies, operates, maritime, land or air terminals, remits by mail any of the goods, included in the National Control list of Dual-Use Goods.

[109]  Part of the US State Department’s Bureau of International Security and Non-proliferation (ISN), EXBS works with partner governments throughout the world seeking “to prevent the proliferation of weapons of mass destruction… by helping to build effective national strategic trade control systems in countries that possess, produce, or supply strategic items, as well as in countries through which these items are most likely to transit.” https://www.state.gov/t/isn/ecc/c27911.htm

[110]  https://www.unodc.org/ropan/en/BorderControl/container-control/ccp.html

[111]  https://www.wassenaar.org/

[112]  https://australiagroup.net/en/

[113]  http://www.nuclearsuppliersgroup.org/en/

[114]  http://mtcr.info/

[115]  http://trade.ec.europa.eu/doclib/html/155445.htm

[116]  https://unstats.un.org/unsd/tradekb/Knowledgebase/50018/Harmonized-Commodity-Description-and-Coding-Systems-HS

[117]  Organisation for Security and Co-operation in Europe: https://www.osce.org/

[118]  Council Regulation 428/2009/EC (as amended): http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1527179601283&uri=CELEX:02009R0428-20171216

[119]  For a handy summary of the ICP requirements, see https://www.steptoeinternationalcomplianceblog.com/2018/10/eu-promotes-export-controls-and-sanctions-compliance-programs/#page=1

[120]  An authorisation shall be required if, while not listed, the items in question are or may be intended, in their entirety or in part, for use” at any stage of development of chemical, biological, or nuclear weapons, or “are or may be intended, in their entirety or in part, for a military end-use, exported to countries subject to an arms embargo, or intended for use as a component of listed military items exported without authorisation; and it is the responsibility of the exporter to report to the authorities any awareness that the item he wants to export falls into these categories, even if non-listed.

[121]  Article 2(5) of the EU Regulation refers: “brokering services” means the negotiation or arrangement of transactions for the purchase, sale or supply of dual-use items from a third country to any other third country, or the selling or buying of dual-use items that are located in third countries for their transfer to another third country – but the sole provision of ancillary services is excluded from this definition; such ancillary services are transportation, financial services, insurance or re-insurance, or general advertising or promotion.

[122]  Though the GAFILAT MER noted a shortcoming in that the agent was not obliged to undertake “proactive” action, but merely had to obtain and file the information supplied on the purported activity of the legal entity: see paragraph 477.

[123]  See MER paragraph 480.

[124]  See MER paragraph 481.

[125]  Corte Suprema de Justicia.

[126]  Tribunal Circuital.

[127]  https://www.u4.no/publications/panama-overview-of-corruption-risks-in-the-judiciary-and-prosecution-service

[128]  http://www.unodc.org/unodc/en/frontpage/2016/June/unodc-supporting-criminal-procedure-reform-in-panama.html

[129]  Ibid.

[130]  The index, which ranks 180 countries and territories by their perceived levels of public sector corruption according to experts and businesspeople, uses a scale of 0 to 100, where 0 is highly corrupt and 100 is very clean: https://www.transparency.org/news/feature/corruption_perceptions_index_2017#table

[131]  http://info.worldbank.org/governance/wgi/#home

[132] https://www.transparency.org/news/pressrelease/panamanian_authorities_must_ensure_extradited_former_president_faces_justic

[133]  http://www.zolicol.gob.pa/index.php

[134]  http://www.oecd.org/countries/panama/

[135]  https://www.businesspanama.com/invest-in-panama/colon-free-zone-and-other-free-zones/34/b/

[136]  http://www.zolicol.gob.pa/en/colon-puerto-libre

[137]  http://www.fatf-gafi.org/publications/methodsandtrends/documents/moneylaunderingvulnerabilitiesoffreetradezones.html

[138]  https://www.tracit.org/uploads/1/0/2/2/102238034/eiu_ftz_illicit_trade_paper.pdf  The Global Illicit Trade Environment Index is commissioned by the Transnational Alliance to Combat Illicit Trade (TRACIT) and produced by The Economist Intelligence Unit (EIU).  The Index evaluates 84 countries on their structural capability to guard against illicit trade, highlighting specific strengths and weaknesses.

[139]  Though this was a fall from its peak year of 2012, when trade was valued at $3.8 billion.

[140]   Cigarettes that are usually manufactured legitimately but are smuggled for the purposes of tax/duty avoidance/evasion.

[141]  http://www.europarl.europa.eu/RegData/etudes/STUD/2018/627114/EPRS_STU(2018)627114_EN.pdf

[142]  Although the oldest free port catering for art and other valuables is in Geneva, where the city’s first free port was set up in 1854.

[143]  http://www.panamapacifico.com/en/

[144]  Law 41 of 2004 created the Panama Pacifico Special Economic Area.

[145]  https://logistics.gatech.pa/en/assets/logistics-parks/panama-logistics-park

[146]  For background to the firm see: https://www.occrp.org/en/panamapapers/inside-the-fall-of-mossack-fonseca

[147]  https://www.icij.org/investigations/panama-papers/pages/panama-papers-about-the-investigation/

[148]  https://www.occrp.org/en/panamapapers/

[149]  https://www.occrp.org/en/panamapapers/mossack-fonseca/

[150]  Lava Jato.

[151]  https://www.icij.org/investigations/panama-papers/20170210-mossfon-panama-arrests/

[152]  In 2017, the company reached a settlement with Panamanian authorities: https://www.reuters.com/article/us-panama-odebrecht/odebrecht-agrees-to-pay-220-million-fine-aid-panama-probe-idUSKBN1AH57C

[153]  https://www.occrp.org/en/panamapapers/inside-the-fall-of-mossack-fonseca

[154]  https://www.occrp.org/en/panamapapers/inside-the-fall-of-mossack-fonseca

[155]  According to the Smithsonian Institute, one meaning of “Panama” is said to mean “abundance of fish”!

[156]  https://insider.si.edu/2014/07/scientists-say-panama-fish-catch-vastly-reported/

[157]  http://europa.eu/rapid/press-release_MEMO-15-5738_en.htm

[158]  https://news.mongabay.com/2018/11/panama-namibia-plan-to-reveal-fishing-fleet-data-via-online-map/

[159]  It provides a mapping platform that allows anyone to view or download data and investigate fishing activity in near real-time, for free: https://globalfishingwatch.org/

[160]  The Automatic Identification System (AIS) information is publicly available; the Vessel Monitoring System (VMS) is proprietary to individual countries.

[161]  A non-profit environmental co-ordination platform made up of 4 environmental funds, including the Fundación Natura in Panama: https://redpacifico.net/en/home/

[162]  Global Witness argues that conflict diamonds are defined by the Kimberley Process as ‘rough diamonds used by rebel movements to finance wars against legitimate governments’; and, as a result of this narrow definition, the Kimberley Process is not empowered to address the broader range of risks to human rights posed by the trade in diamonds.  Furthermore, as the Kimberley Process applies only to rough diamonds, once stones are cut and polished, they are no longer covered by the scheme.

[163]  https://www.kimberleyprocess.com/en/panama-0

[164]  “Dirty Diamonds in Panama”: http://www.css.ethz.ch/en/services/digital-library/articles/article.html/108972/pdf

[165]  http://www.diamondintelligence.com/magazine/magazine.aspx?id=7454

[166]  For more information on ITBMS see https://home.kpmg.com/xx/en/home/insights/2018/10/panama-indirect-tax-guide.html

[167]  http://www.oecd.org/countries/panama/

[168]  US State Department, 2018: https://www.state.gov/j/tip/rls/tiprpt/countries/2018/282727.htm

[169]  There is at least anecdotal information that Panama issues a number of visas to Colombian women to work as prostitutes – prostitution is legal in Panama.

[170]  https://dialogo-americas.com/en/articles/human-trafficking-china-sounds-alarm-latin-america

[171]  Somewhat ironical perhaps, given that the US Border patrol was originally established not to keep out Mexicans and others from Central America, but rather the Chinese.

[172]  In Panama, the PPO was quoted as saying that the smuggling ring in Panama consisted of Panamanian citizens and foreigners.

[173] https://www.state.gov/j/tip/rls/tiprpt/countries/2018/282727.htm

[174]  Hence, Panama is placed in “Tier 2”; meaning Countries whose governments do not fully meet the TVPA’s minimum standards, but are making significant efforts to bring themselves into compliance with those standards.

[175]  Although the report notes that it had disbanded the specialist police unit set up in 2016.

[176]  http://www.ilo.org/dyn/natlex/docs/ELECTRONIC/90928/105157/F-1007537726/PAN90928.pdf

[177]  http://www.programamesoamerica.iom.int/en/news/panama-drafts-its-national-plan-against-human-trafficking

[178]  http://evaw-global-database.unwomen.org/fr/countries/americas/panama/2012/plan-nacional-contra-la-trata-de-personas

[179]  Law 79 of 2011 on trafficking in persons and related activities; originally criminalised human trafficking. (Ley N⁰ 79 sobre Trata de Personas y Actividades Conexas).

[180]  Even where there is no sexual or labour exploitation.

[181]  For example, see reports of an example case in 2017: https://www.insightcrime.org/news/brief/human-trafficking-network-dismantled-in-panama/

[182]  https://www.panamatoday.com/panama/human-trafficking-continues-active-panama-6501 27/3/18

SHIPPING, INSURANCE AND AML/CFT/CFP (UPDATED)

SHIPPING, INSURANCE AND AML/CFT/CFP

INDEX

  1. INTRODUCTION
  2. THE SHIPPING INSURANCE SECTOR
  3. THE THREATS FACED BY SHIPPING
  4. HOW CAN THE SHIPPING INSURANCE SECTOR PLAY ITS PART?
  5. CONCLUSION

INTRODUCTION

In a previous post I considered if shipping registries could have a role to play in ensuring that shipping is not used to circumvent not only UN (and other) sanctions, but also other export and trade controls, smuggling, human trafficking and other illicit activities[1].  My point was that, in addition to law enforcement and regulators, if other parts of what may be described as the industry’s supporting structure – including corporate service providers, lawyers and banks – have some role as “gatekeepers”, if only to prevent themselves becoming liable, then perhaps the registries also had a part to play.  After all, it is in everyone’s interest (except, of course, for the criminals, sanctions-busters and terrorist involved) to try to prevent of detect such illicit activities.

There are others involved in the shipping industry that might play a part.  In addition to the other obvious players – the owners and operators of the vessels and those supplying cargoes, passengers and crew – there are those that insure the vessels and their cargo, and the classification societies that provide guarantees as to technical and safety standards for the construction and operation of ships and offshore structures[2].

THE SHIPPING INSURANCE SECTOR

Considering the insurance element, marine insurance covers the loss of ships, cargo, terminals and any transport of cargo by which the property is transferred, acquired or held between points of origin and final destination[3].

However, a marine policy typically covers only around three-quarters of the liabilities towards third parties that could arise, such as through collision, going aground or wreck removal.  To cover the remaining liabilities, in the 19th Century shipowners banded together to form what are termed Protection and Indemnity Clubs (or “P+I Clubs”).  These are a form of mutual insurance society where members pay a premium, which is then used to purchase reinsurance, with further calls made on members for payments should the Club suffer excessive losses, though the Club would seek to establish a reserve to cover such eventualities.

To take one example, the American P+I Club[4] lists the main risks for which P+I insurance would provide cover for shipowners, operators and charterers for third party liabilities encountered in the commercial operation of their vessels.  These include –

  • loss of life, injury and illness of crew (including repatriation costs), or of passengers and other persons;
  • cargo loss, shortage or damage;
  • fines and penalties;
  • mutiny and misconduct by the crew; and
  • vessel diversion expenses.

There are other, more specialised forms of insurance relevant to the shipping industry, such as that which may be made available for yachts and other pleasure craft and fishing vessels.  The there is “war risk” insurance for specific regions of particularly high risk, and cargo insurance, where the premium and risk depends on the type of cargo involved.  A particular type of insurance that has developed over recent years is that for kidnap and ransom, which exists to pay for the release of a ship (and/or cargo and crew) held by pirates, and which has priority over claims made under any other policy[5].

THE THREATS FACED BY SHIPPING

In the previous post concerning registries, I briefly mentioned the various threats that could be faced by ships and shipping, and saying that in recent years extensive evidence of the role of shipping in a wide range of illegal activities, and not just in “traditional” smuggling and perhaps obvious crimes like human trafficking, but anything from the role played in the evasion of UN sanctions on North Korea to the involvement of vessels in illegal, unreported and unregulated (IUU) fishing[6].

In a later post, I compiled a list[7], almost certainly incomplete and with only brief outlines of the topics included, of the various crimes, regimes and requirements that the average compliance officer in a regulated business might want to bear in mind.  Whilst not all of these would be relevant to the shipping industry (online gambling, for example), many were – in addition to those mentioned above, there were the quite obvious ones of trade-based money laundering and other trade-based financial crime[8]; import, export, transit and transhipment licensing violations; exchange control violations and bulk cash smuggling; modern slavery and other human rights abuses (including of the crews themselves[9]; bribery and corruption[10]; proliferation activities linked to WMD and their means of delivery[11] and related financing[12]; terrorism-related movements of people, goods and finances; breaches of UN, EU or other sanctions controls; the shipment of counterfeit goods or blood or conflict diamonds[13].

All of the above are in addition to the more obvious risks to shipping, through piracy, theft of vessels or cargo and threats to officers, passengers and crew.

There are huge amounts of money involved in trade-based financial crime[14], huge potential risks from terrorism and proliferation, and terrible suffering and hardship present in such things as human trafficking and slavery at sea.

The again, the ships themselves, or their cargo, may be the “tool”, benefit or value being moved in a money laundering, terrorist financing or proliferation financing arrangement.  This is obviously the case for trade-based money laundering and other trade-based financial crime, where the cargo (real, non-existent, misdescribed or misrepresented) may be the main element.

In 2018, the case of Engelhart CTP (US) LLC v Lloyd’s Syndicate 1221[15] provided an example of a fraud involving a ship’s cargo, and which in that case resulted in an insurance claim.  The cargo, said to be 7,000 tonnes of copper ingots carried in containers, turned out to be, in fact, only slag of no commercial value when the containers had to be opened to inspect a leak.  It transpired that the bill of lading, packing lists and quality certificates were all fraudulent.  The assured claimants were not party to the fraud.  They made a claim on the open policy held for a range of commodities – but as the “copper” involved had never existed there had been no cargo to be physically damaged or lost, and so the claim failed.  The claimant also failed in seeking to take advantage of a “shortage of contents” clause, given that the goods supposedly covered were, in fact, fictitious.  The insurers rightly argued that none of the clauses of the contract provided cover for the acceptance of fraudulent documents for a non-existent cargo.  Amongst other things, this case illustrates that shipowners and others cannot rely on the mere fact of not having been party to a fraud or other illicit activity when seeking recompense.

Another 2018 case[16] further underlined the above point.  In that case divers discovered drugs attached to the exterior of the ship’s hull (the Master and one of the officers were subsequently convicted of involvement in drug smuggling) and the ship remained detained by the authorities for 3 years, having been abandoned by its owners after 2 years.  The owners then made a claim against their insurers which ended up being rejected by the Court of Appeal and Supreme Court in the UK.  The owners had made their claim under “war risks” insurance and the courts held that the smuggling of drugs was not a “war risk”, and the “customs regulation exclusion” did apply[17].

The UK P+I Club, for one, has a formal AML policy[18] as part of its governance code.  It says that it seeks to ensure compliance with internationally recognised practices, standards and regulation for the prevention of money laundering.  This is good.  However, I would question to what extent that or any other P+I Club is integrated into any information-sharing and consultation arrangement that might exist, for example, were it a bank or other financial institution.  My own view is that they should be included, and have an important role to play, particularly in respect of sanctions and trade-based money laundering and trade-based financial crime.

In sanctions cases, the acquisition, chartering or use of the ship might be to evade prohibitions and restrictions in place.  Currently, the most high-profile situation involving the control of shipping in respect of sanctions measures involves North Korea – where ships, shipowners and even a (Russian) port service company[19] have been listed in sanctions lists.  In February 2018, the US Treasury published an Advisory detailing deceptive practices employed by and for North Korea and involving shipping, and risk mitigation measures that could be adopted[20]; in November 2018 it issued a further Advisory in similar vein, but this time addressing sanctions risks related to the shipping of petroleum products to Syria[21].  In August 2018, it had once more issued a warning in respect of North Korean sanctions, reminding the shipping industry, including flag states, ship owners and operators, crew members and captains, insurance companies, brokers, oil companies, ports, classification service providers, and others of the significant risks posed by North Korea’s shipping practices.

However, the threats arising from sanctions are not new, and at least one P+I Club has suffered as a consequence in the recent past.  In May 2013, the American P+I Club reached an agreement to pay the US authorities around $350,000 in settlement for the potential liability involved in 55 violations of US sanctions on Cuba, Sudan and Iran.  These related to the settling of P+I claims and providing security by way of letters of undertaking and letters of indemnity.  This may be one reason why this P+I Club at least now has fairly comprehensive guidance for its members on how to comply with US, EU and other sanctions prohibitions and restrictions[22].

The specialist UN agency, the International Maritime Organisation, does have a focus on what is describes as maritime security.  However, its concentration is on the safety and security of ships, and the people and cargo on those ships.  It touches upon, for example, human trafficking and terrorism, but in a rather, to my mind, narrow sense.  On terrorism, it says that it aims to provide an international legal framework to deal with those committing unlawful acts against ships (and fixed platforms on the continental shelf), including the seizure of ships by force; acts of violence against persons on board ships; and the placing of devices on board a ship which are likely to destroy or damage it. Notably, it does not mention financing and laundering activities that might be linked to those activities it does mention, or which may be entirely unrelated.

Finally, the risk might involve frauds directed against the insurers by means of the actual or purported total loss or vessel and/or cargo – a crime as old as the marine insurance industry, or even of shipping itself – and one to which the insurance industry might be expected to be most acutely attuned[23].

Currently, when a country is evaluated by FATF or one of its regional affiliates, the evaluation does not directly touch upon that country’s shipping registry (it would probably not be on the evaluation team’s visit schedule), and would likely only touch upon any shipping insurance element in the context of the overall insurance sector.  However, any scandal affecting shipping linked to the country can colour the evaluation and the outside perception of the integrity of the jurisdictions.  Furthermore, any such scandal would be likely to spill over, if not directly implicate, other business sectors (lawyers, corporate service providers etc).

HOW CAN THE SHIPPING INSURANCE SECTOR PLAY ITS PART?

It appears to me that there three ways in which the shipping sector as a whole, including the P+I Clubs, and their agents could help to improve the prevention and detection of crimes –

  • increase awareness of the risks, and possible indicators – there are bodies already in existence that track threats from piracy, and the International Maritime Bureau of the International Chamber of Commerce is an important one[24];
  • improve the availability, exchange and dissemination of information between all parties involved – between insurers, between agents, amongst shipowners, and establish channels of (two-way) communication between these and law enforcement and financial intelligence units;
  • enable or require other parties to also be aware of the risks, carry out checks and generally exercise appropriate due diligence – this could apply to all the agents, charterers and representatives used[25]

The third of these bullet points is that which I suggest would be the one that the shipping sector could most usefully take on board and implement.  Taken together with the other two, there should also be –

  • an improvement in (or even just implementing) “know your customer” and due diligence checks – on an ongoing basis and not only when taking on a new customer, client, supplier etc; and
  • each business or organisation needs also to undertake meaningful risk assessments of areas of business.

If these measures were put in place, they could not only help to prevent or detect illicit activity, but may well benefit the business or organisation directly by providing some degree of protection against allegations of not doing enough to prevent bribery, corruption or involvement

CONCLUSION

As with the shipping registries, it appears to me that the role or roles that the P+I Clubs in particular could play in combating serious trade-based crime, and especially sanctions violations and proliferation activities has been under-appreciated in the past.  They need to be included in any discussion, and any information-sharing arrangements.

The increasing spread of anti-bribery and anti-corruption legislation, and of legislation seeking to penalise human rights abuses, all of which can have extra-territorial effect (or might apply anyway because it is the law of the flag state of the vessel concerned) presents a threat to insurers and their clients and members of P+I Clubs.

Whether or not FATF and similar bodies directly addresses the activities and shortcomings of shipping registries and the marine insurance sector, there remains the real risk of problems in those areas, or spilling over from those areas into others which are evaluated by FATF and others, affecting evaluations, ratings and perceptions of a jurisdiction.

Therefore, if only from the purpose of self-protection it appears to make sense for businesses and organisations involved to examine, revise and upgrade (or implement) controls and procedures.

It also appears important, from a jurisdiction’s point of view, to ensure that the shipping sector as a whole is included in any national risk assessment, and in any consultative and information-sharing arrangements.

 

Ray Todd

18th August 2018

Updated 21st November 2018

 

AMENDMENTS TO THIS PAPER

21 November 2018

Numbered index and page numbering added.

In “The threats faced by shipping”, added reference to US Treasury Advisory of November 2018.

Also in “Threats faced by shipping”, added references to two 2018 court cases that involve failed insurance claims relating to illicit activity.

[1]  https://wordpress.com/post/raytodd.blog/3168

[2]  Classification societies set technical rules based on experience and research, confirm that designs and calculations meet those rules, survey ships and structures – both during construction and commissioning and periodically thereafter – to ensure that they continue to are in accordance with the rules.

[3]  For a fuller description of marine insurance and its scope see https://thelawreviews.co.uk/edition/the-shipping-law-review-edition-5/1170842/marine-insurance

[4]  https://www.american-club.com/

[5] Under English law at least, the payment of ransom to pirates is not, in itself, illegal, and there is anyway a strong moral argument to do to secure the release of any individuals held.  However, it should be noted that care has to be taken not to breach any relevant sanctions measures involving terrorist groups as, in essence, pay outs may be made to criminals, but not to or for terrorists.  For example, see https://www.gov.im/news/2015/aug/07/united-nations-and-european-union-sanctions-ransom-payments/

Modern piracy is by no means as rare as one might think; see https://www.icc-ccs.org/piracy-reporting-centre/live-piracy-map for a map detailing attacks made in 2018.  See also guidance on www.maritimeglobalsecurity.org, a stakeholder in which is the International Group of P+I Clubs.

[6]  The EU Regulation to prevent, deter and eliminate IUU fishing entered into force on 1st January 2010.  The European Commission reports that it is working actively with all stakeholders to ensure coherent application of the IUU Regulation.  Meanwhile, Greenpeace has issued lists said to contain the names of irresponsible fishing operators and the companies behind them – http://blacklist.greenpeace.org/home

[7]  https://wordpress.com/post/raytodd.blog/3429

[8]  See https://www.gov.im/media/1348726/notice-1000-man-trade-based-money-laundering-july-18.pdf

[9]  Seen as a particular risk in IUU fishing; see http://www.ilo.org/global/topics/forced-labour/policy-areas/fisheries/lang–en/index.htm

[10]  Even more of a risk given the extra-territorial reach of such legislation as the Bribery Act 2010 in the UK and the Foreign and Corrupt Practices Act in the US.  The UK P+I Club has an anti-bribery policy, for example, to meet the requirements of the Bribery Act: https://www.ukpandi.com/about-us/corporate-governance/compliance-regulatory/anti-bribery-policy/

[11] Including procurement and transport of materials, components, fuel etc and delivery systems, such as rockets and missiles, and their components, guidance systems etc.

[12]  See https://www.gov.im/media/1352777/notice-1008-man-proliferation-and-proliferation-financing-risks-2-jul-18.pdf

[13]  See https://www.gov.im/media/80563/sanctions-notice-27-kimberley-process-certification-scheme-imports-and-exports-of-rough-diamonds-27-10-16.pdf

[14] $950 billion in 2014, according to the Global Finance Initiative.

[15]  https://www.shlegal.com/insights/shippingbulletin—november-2018#fraudulentdocuments

[16]  Navigators Insurance Company Ltd and others v Atlasnavios – Navegacao Lda, The “B ATLANTIC”

[17]  Interestingly, in its report of the case, Stephenson Hardwood made the point that: “Although the smuggling was a wrongful act done intentionally without just cause or excuse, it was not ‘malicious’ within the meaning of insuring clause 1.5. In the context of war risks insurance policies, ‘malice’ has to involve spite, ill-will or the like which is directed towards property or persons. Drug smugglers do not intend for a vessel to be detained or for any other property or persons to be lost or damaged. To the contrary, they intend that the drugs avoid detection, that the vessel, property and persons remain unharmed and therefore that the intended recipients get what they have paid for.”: https://www.shlegal.com/insights/shippingbulletin—november-2018#fraudulentdocuments

[18]  https://www.ukpandi.com/about-us/corporate-governance/compliance-regulatory/anti-money-laundering-policy/

[19]  Sanctions imposed in August 2018 by the US Treasury on Profinet Pte, which provides services at Nakhodka, Vostochny, Vladivostok, and Slavyanka, were thought to be the first time such sanctions had been imposed on a port services operator (its director was also designated by the US Treasury).  This perhaps indicates that the reach of such measures continues to expand into new and hitherto largely unaffected areas.

[20]  https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/dprk_vessel_advisory_02232018.pdf

[21]  https://www.treasury.gov/resource-center/sanctions/Programs/Documents/syria_shipping_advisory_11202018.pdf

[22]   https://www.american-club.com/

[23]  A classic case was that of the scuttling of the supertanker Salem in 1980, a case that also involved sanctions-busting with oil being delivered to apartheid South Africa.  The story is an amazing one, and well worth reading.  The architect of the scam, jailed for 35 years in the US in 1985, but then escaped from prison 3 years later.  See http://archives.datapages.com/data/phi/2004/85.htm

[24]  Established in 1981 (in the wake of the Salem scandal), it is a non-profit making organisation that acts as a focal point in the fight against all types of maritime crime and malpractice.  It has MoU with both the World Customs Organisation and Interpol, and the International Maritime Organisation has urged governments, all interests and organisations to co-operate and exchange information with each other and with the IMB with a view to maintaining and developing a co-ordinated action in combating maritime fraud.  The IMB provides an authentication service for trade finance documentation. It also investigates and reports on a number of other topics, notably documentary credit fraud, charter party fraud, cargo theft, ship deviation and ship finance fraud.

[25]  With the increase in such systems as the EU’s Authorised Economic Operator (AEO) scheme and security requirements for the pre-clearance of cargo entering the US, such requirements could be built into agreements with third parties – which would no doubt be useful when applying for AEO status or the equivalent.  It would also be of use to defend one’s position if implicated by another’s nefarious activities – the UK Bribery Act, for example, provides for a defence if a business has adequate arrangements in place to prevent bribery taking place.

FATF: DENMARK AML/CFT EVALUATION FOLLOW-UP REPORT

On 21st November, FATF published a follow-up report saying that, as a result of Denmark’s progress in strengthening its framework to tackle money laundering and terrorist financing since its 2017 mutual evaluation, FATF has re-rated the country on 10 of the 40 Recommendations.  FATF has re-rated Denmark on the following Recommendations:

2              National cooperation and coordination from partially compliant to largely compliant

10            Customer due diligence from partially compliant to largely compliant

12           Politically exposed persons from partially compliant to compliant

15            New technologies from partially compliant to largely compliant

16           Wire transfers from partially compliant to largely compliant

17            Reliance on third parties from partially compliant to largely compliant

22            DNFBPs: Customer due diligence – from partially compliant to largely compliant

24           Transparency and beneficial ownership of legal persons – from partially compliant to largely compliant

33           Statistics from partially compliant to largely compliant

The report also looks at whether Denmark’s measures meet the requirements of FATF Recommendations that have changed since their 2017 mutual evaluation, taking into account any new measures since the mutual evaluation. The FATF has re-rated Denmark on the following Recommendation:

18 – Internal controls and foreign branches and subsidiaries from partially compliant to largely compliant

The FATF agreed to maintain the partially compliant rating for Recommendation 7 and the compliant rating for Recommendation 21.

fatf

http://www.fatf-gafi.org/publications/mutualevaluations/documents/fur-denmark-2018.html